P2P Lending Booms: How Does It Affect Economy?

Fintech P2P Lending

When banks significantly cut back on lending in the wake of the financial crisis in 2007, both because their capital was wiped out and increased regulations to keep out unqualified borrowers took effect, small businesses needing a loan and individuals desperate for safe investments were able to combine their needs, and a peer-to-peer lending industry popped up.

As Bloomberg explained this month, Lending Club, one of the biggest peer-to-peer lending services, was started in June 2007, just before the beginning of the financial crisis. Since then, the number of loans the company has made has doubled each year – and that’s after turning down 90 percent of applicants. The service is also known for its low default rates, a rarity after the crisis, and appears to be a win-win for borrowers and lenders.

China’s P2P Lending Industry

But China presents issues with the system. In a country where only 3 percent of small businesses have been able to get loans due to the government’s strict restrictions regarding lending, almost 2,000 peer-to-peer sites have been created since 2007. Of those, many have much higher default rates than banks, and are known for their abuse and fraud within the system.

Despite China’s lending system, the idea of peer-to-peer lending remains popular in the U.S. and will likely remain so. But, just like how reckless lending led to the 2008 financial crisis – which in turn led to the growth of peer-to-peer lending – it still remains important to stay on top of credit and risk management. For both banks and services like Lending Club, risk management tools can help keep delinquencies low, especially as services and applications increase.

In addition, the creation of peer-to-peer lending suggests that a new form of lending can be just around the corner, and remaining adaptable is also important for any financial service. With low interest rates and low default rates, the peer-to-peer lending industry will likely stick around.