Peer-to-peer lending pretty much involves lending to people who can't get loans from banks, and the banks are actually pretty good at deciding who is too risky to lend money to, so why should this be a surprise?
The only way peer-to-peer lending will succeed is if the banks are overlooking or turning away a large group of creditworthy customers, and so far it doesn't seem like that is happening.
"banks are overlooking or turning away a large group of creditworthy customers, and so far it doesn't seem like that is happening."
Bank do refuse to lend to large segments of the population which can be lent to profitably.
In China, part of the reason is caps on loan interest rates.
But banks in developed countries, like the US and the UK, also fail to serve a large segment of the population. Those underserved by banks have limited options to get loans for emergencies etc., and difficulty building their credit history to gain access to cheaper credit in future.
If you're based in London and are a software engineer or data scientist interested in solving this problem, please email me (personal address in profile) and I can tell you about what we've built so far and what's ahead.
"and the banks are actually pretty good at deciding who is too risky to lend money to"
Uh, no.
Chinese banks are politicized, they lend for the strategic impetus of the government, which in itself is often really just the result of patronage (read: soft corruption) anyhow. And even without that you have crazy targets which distorts not only lending, but entire sectors of the economy.
Chinese lending is la-la land and not really based on credit worthiness.
Also - lending is all intertwined, public or not. Credit doesn't care where credit comes from, so if this lending bubble is big enough it could cause a recession. And now that China is #1 or #2 sized economy, it would possibly hit everyone.
It seems to me like, if you took a credit union, and then stripped out all the junk that isn't actually savings or loan - so free checking accounts, debit cards, ATM networks, branch locations & most the services offered therein, FDIC insurance, etc etc - how would that compare to Lending Club?
The biggest remaining difference would be the "peer to peer" bit itself. Which feels like a good thing to drop to me. From a purely financial perspective, the "you choose who to loan to" just feels like a way to introduce economic inefficiencies: The loan facilitator doesn't have a whole lot on the line, so they're poorly incentivized to do their due diligence on each loan. And the lender doesn't have direct access to the borrower, so they aren't able to do so in the first place. Nor, being non-bankers, are they likely to have the expertise to do a great job of it even if they could.
The more I think about it, the more peer-to-peer lending, at least as I understand it, sounds like CDOs in tie-dyed T-shirts.
> the banks are actually pretty good at deciding who is too risky to lend money to
This seems like a pretty shitty premise given the US mortgage meltdown of 2007.
In any case, peer-to-peer lending also has viability in microloans. The traditional alternatives for that have been credit cards (specifically the cash withdrawal), payday loans, and pawn shops, all of which have distinct downsides.
First of all banks in China works very differently from those in US. It's very hard for individuals and small companies to get loans from banks.
Secondly, there are tons of companies working on peer-to-peer lending in US as well. Lending Club and Prosper has been around for a while. Newer ones like Upstart and Lendup are also in the same category. Their claims essentially that they have more data and better models to make better decisions than what traditional banks can do
I worked at one such lender. Here’s how they actually work with banks.
Banks, being an integral part of the financial system, are only allowed to take on so much risk. Third party companies have no such restrictions. But they can’t issue loans because they are not a bank. So what happens is a bank issues a loan according to criteria the bank and the third party agree to. Then the bank sells it the next day to the third party. That way the bank is more insulated from risk because they aren’t holding the loan.
Some p2p companies such as lending club actually do the same thing. The bank sells the loan to lending club, and then lending club essentially “sells” to all the individual investors: lending club doesn’t take the hit when people default.
The downside of such a model, besides missing out on upside, is requiring volume. You need lots of it to keep the lights on. So if investors get spooked you are in a world of hurt, which is probably what is happening here.
In developed countries with effective credit scoring methods, this is true. In developing countries, the banks don't have good methods of effectively scoring vast chunks of the population, plus the amounts poorer people would want as loans is smaller, so it's easier to just ignore them in favour of bigger clients. Tech companies are now trying to step in with innovative ways of credit scoring through phone data analysis(e.g reading through SMS for mobile money transactions, gambling transactions etc)
Banks are messed up in China and won’t officially lend to companies that aren’t really safe bets or politically connected (SOEs). As a result, a lot of shadow and underground banking was needed to fill in the gaps, the P2P lending being basically an extension of that.
For consumers, it’s a bit different, but again the kind of official loans available are much more restricted than the developed world, with lots of unofficial lending again filling in the gaps.
So far, 130 million euro's have been lend through the largest peer-to-peer lending platform in the Netherlands, www.geldvoorelkaar.nl. This was spread over 1300 projects. Over all the projects, the average interest rate (after incorporation of defaults) was 4-5%. This is not good enough for a bank, especially considering they would have to check each individual project, whereas that is now done by 'the crowd'. Still, it is a lot better than you can get through a savings account as a consumer, and a lot more fun than investing in big companies.
The theory is that fixed costs for banks are so high they cant profitably source and score these loans. However Fintech p2p firms can using "technology".
Note in my experience most p2p financing companies aren't actually peer to peer. They have a bunch of cash from investors, banks or other p2p loans companies which they then loan out.
If you calculate risk and charge a high enough interest rate you can make a profit. That's how a lot of the predatory load practices work. They charge an extremely high rate to people who normally can't get credit.
Posted this because having heard of P2P lending before, I had no idea that it had grown to such a large ( scale and scope ) industry. The most recent exposure I've had to P2P lending or microloans is probably Kiva's more charitable based business model.
But these new companies are certainly not in that space, as some are charging up to 20% on interest!? Who's taking loans at that level, and who's funding it at that level on this type of trust system??
Still haven't read enough to form a solid opinion, but it is an intriguing space. I definitely see the value in providing capital and easier access to capital to people who probably never had the opportunity, but the space seems ripe for fraud, manipulation, high defaults, etc.
>But these new companies are certainly not in that space, as some are charging up to 20% on interest!? Who's taking loans at that level, and who's funding it at that level on this type of trust system??
That's cute. LendUp is charging upwards of 900% APR on short term loans [0]. Usury is nothing new, but until the "disruptive" tech economy picked it up, it had been mostly regulated and outlawed.
Turns out fleecing poor people for everything they have is profitable enough for people to not care.
If you Google around you will see that the interests rates charged by Kiva (or rather Kiva local partners, the ones actually handling the loans) can be pretty high [1].
But keep in mind that interest rates should always be compared to inflation. Lots of developing countries have inflation >10%.
Based on what I know, a large portion of the loans have very small amount and short duration. For instance, people want to borrow 1000 CNY for a month and pay back 1020 afterwards. That's already 2% per month.
EDIT: The reasons they need such loans are more complicated. Some needs money for emergency. Some uses the money to buy stock/cryptocurrencies...
EDIT2: P2P platforms typically take money from the deep pockets and subdivide into tiny loans. They earn the interest rate difference (e.g. 20% from users vs 15% to capital providers).
> high defaults
Empirically the default rate is very low. People pay back on time if you call or just text them. Honestly if they don't pay, it's totally fine, and the P2P platforms just don't care, because they earn so much money...
This is not a surprise, lending on a P2P platform is a "cool" idea but doesn't end up making you much money since you have to keep rates competitive and you always have the risk of someone not paying back.
As a lender on Lending Club, I don't recommend it. The returns are worse than a bad year on the stock market holding ETFs.
I've stopped lending on there and now I'm just waiting to move my money elsewhere.
I've pulled my investments out of Lending Club and Prosper. Too difficult to track returns (maybe this has since been fixed) and many loans seem to default (even higher rated ones IME).
> The returns are worse than a bad year on the stock market holding ETFs.
In 2008 the stock market fell 50%.
The last 10 years we've not had any bad years in the stock market, largely due to trillions of dollars of money printed by central banks in order to prop up the markets and to create a so-called "wealth effect". Expect a reckoning in the coming years.
Just because the returns are lower doesn't necessarily mean it's a bad strategy.
As MPT states, as long as the returns are un-correlated to the stock market they can improve the risk-adjusted returns to a portfolio. Even if the return is lower (but still positive).
I'm confused. Why are these firms "shutting down" if they don't have any exposure to the loans they brokered?
I mean, the description of the business model sounds like it's a bunch of transactional companies like ebay or paypal or whatever. Those might be expected to "fail" if the overall market shrinks, if expected growth didn't arrive, or if they get beaten by a competitor. But they don't fail "like dominoes". If anything the exit of one player would be expected to strengthen its competitors.
But the headline and analysis is using terminology that make this sound like a credit crisis. Is it?
> the description of the business model sounds like it's a bunch of transactional companies
From the “people that are running these P2P companies don’t actually understand what P2P really is,” these sound more like badly-run Prospers than true P2P lenders.
"About 118 P2P lenders have failed in July, the most since 2016" -- 200+ funds failed in Aug. 2016.
"Shakeout’s impact on the financial system has been limited" -- because bond holders are individual investors; it will depress future demand, but no systemic risk.
I’ve been hearing this since 2011. The Chinese government seems to have an amazing ability to get control over the situation as it always seems to be teetering on the brink.
That's pretending nothing has changed since 2011. It's interesting you pick that year, because that's not long after China's former approach collapsed with the global consumer in the great recession, and they had to switch to gorging on debt to continue faking a high rate of growth.
It's also fascinating that China would install a dictatorship right as this switch-over - from organic growth to extreme debt - was occurring. I'd wager the Communist Party is terrified of what's coming socially, and given their overwhelming vote in favor of the dictatorship they think that power is going to be necessary to control the people (they very knowingly voted to clamp down on all human rights in the country by handing Xi that position).
Since 2011 they've taken on tens of trillions of dollars in new debt. As recently as 2008 China's debt to GDP ratio was reasonable. Their debt to GDP ratio has drastically worsened since and is very realistically the worst among major economies now (when their immense shadow debt is included it's a certainty). Household debt to income ratios have similarly gotten dramatically worse in the last decade. There are in fact limits to how far a nation can push such things.
Somewhere between 1/4 and 1/3 of their new GDP every year is going just to new debt interest payments. When you consider what else needs to come out of that new GDP, that's a very stark debt situation. In 2011 they also weren't seeing record bond defaults.
The types that cry wolf are often early or very early in their predictions. One has to ask if there is in fact any truth to what they're saying, instead of only focusing on their regularly saying it. In the end, they may be too early in their speculation, rather than entirely wrong.
China should have accepted slower organic growth and maintained their financial health. They chose the Japan approach of levering up massively on debt when the growth dropped off. They're so terrified of their own people about what happens if growth is 2% instead of 6% (being terrified of their own people is also why they installed the dictatorship to control them). It tells you all you really need to know about their system, it's fragile and can't survive a recession or stagnation.
"Analysts at China International Capital Corp. estimated on July 13 that no more than 200 firms, or about 10 percent of existing platforms, will still be around in three years."
Even for a large nation like China, 2,000 P2P platforms sounds like orders of magnitude more than what is actually needed.
I was literally just looking into the pros and cons of P2P lending because I hadn't heard of it prior to today. I mentioned on another forum how annoying my student loans are being part mine, part my fathers, and all with high interest rates, and someone suggested P2P lending (such as SoFi).
I invested low five figures with Prosper, a US P2P lending platform, for several years about a decade ago. The returns are abysmal (and when the Global Financial Crisis hit, I had a bunch of notes go bad because of bankruptcies). Why? Because P2P lending is lending of last resort. It's one step above payday lending. I highly recommend not lending on P2P platforms.
As a borrower, it might not be a bad deal if you can't get a loan secured by real estate, or a personal loan, to refinance high interest debt. Depending on your circumstances (debt to income ratio, outstanding debt, available credit, income), you might consider using balance transfer offers that get you credit at 3-5% to make headway on high interest debt.
I know someone who works in this industry in China. He cites illegal activities, negligence of risk management procedures, and the resulting fear of illegal activities and anticipation of a crackdown, as leading to the current situation.
Lots of them provide more than 15% ROR, too high that some normal company also put lots of money to p2p. This is crazy and it is certain most of them(p2p) will go broke.
[+] [-] twblalock|7 years ago|reply
The only way peer-to-peer lending will succeed is if the banks are overlooking or turning away a large group of creditworthy customers, and so far it doesn't seem like that is happening.
[+] [-] rahimnathwani|7 years ago|reply
Bank do refuse to lend to large segments of the population which can be lent to profitably.
In China, part of the reason is caps on loan interest rates.
But banks in developed countries, like the US and the UK, also fail to serve a large segment of the population. Those underserved by banks have limited options to get loans for emergencies etc., and difficulty building their credit history to gain access to cheaper credit in future.
If you're based in London and are a software engineer or data scientist interested in solving this problem, please email me (personal address in profile) and I can tell you about what we've built so far and what's ahead.
[+] [-] sonnyblarney|7 years ago|reply
Uh, no.
Chinese banks are politicized, they lend for the strategic impetus of the government, which in itself is often really just the result of patronage (read: soft corruption) anyhow. And even without that you have crazy targets which distorts not only lending, but entire sectors of the economy.
Chinese lending is la-la land and not really based on credit worthiness.
Also - lending is all intertwined, public or not. Credit doesn't care where credit comes from, so if this lending bubble is big enough it could cause a recession. And now that China is #1 or #2 sized economy, it would possibly hit everyone.
[+] [-] bunderbunder|7 years ago|reply
The biggest remaining difference would be the "peer to peer" bit itself. Which feels like a good thing to drop to me. From a purely financial perspective, the "you choose who to loan to" just feels like a way to introduce economic inefficiencies: The loan facilitator doesn't have a whole lot on the line, so they're poorly incentivized to do their due diligence on each loan. And the lender doesn't have direct access to the borrower, so they aren't able to do so in the first place. Nor, being non-bankers, are they likely to have the expertise to do a great job of it even if they could.
The more I think about it, the more peer-to-peer lending, at least as I understand it, sounds like CDOs in tie-dyed T-shirts.
[+] [-] drb91|7 years ago|reply
This seems like a pretty shitty premise given the US mortgage meltdown of 2007.
In any case, peer-to-peer lending also has viability in microloans. The traditional alternatives for that have been credit cards (specifically the cash withdrawal), payday loans, and pawn shops, all of which have distinct downsides.
[+] [-] echevil|7 years ago|reply
Secondly, there are tons of companies working on peer-to-peer lending in US as well. Lending Club and Prosper has been around for a while. Newer ones like Upstart and Lendup are also in the same category. Their claims essentially that they have more data and better models to make better decisions than what traditional banks can do
[+] [-] xivzgrev|7 years ago|reply
Banks, being an integral part of the financial system, are only allowed to take on so much risk. Third party companies have no such restrictions. But they can’t issue loans because they are not a bank. So what happens is a bank issues a loan according to criteria the bank and the third party agree to. Then the bank sells it the next day to the third party. That way the bank is more insulated from risk because they aren’t holding the loan.
Some p2p companies such as lending club actually do the same thing. The bank sells the loan to lending club, and then lending club essentially “sells” to all the individual investors: lending club doesn’t take the hit when people default.
The downside of such a model, besides missing out on upside, is requiring volume. You need lots of it to keep the lights on. So if investors get spooked you are in a world of hurt, which is probably what is happening here.
[+] [-] majani|7 years ago|reply
[+] [-] dragontamer|7 years ago|reply
Well, what you say is certainly true in America. But is it necessarily true in China?
Those are the kinds of assumptions that may not hold as you cross borders.
[+] [-] seanmcdirmid|7 years ago|reply
For consumers, it’s a bit different, but again the kind of official loans available are much more restricted than the developed world, with lots of unofficial lending again filling in the gaps.
[+] [-] evandijk70|7 years ago|reply
[+] [-] ian0|7 years ago|reply
Note in my experience most p2p financing companies aren't actually peer to peer. They have a bunch of cash from investors, banks or other p2p loans companies which they then loan out.
[+] [-] dalore|7 years ago|reply
[+] [-] MichaelMoser123|7 years ago|reply
[+] [-] dtien|7 years ago|reply
But these new companies are certainly not in that space, as some are charging up to 20% on interest!? Who's taking loans at that level, and who's funding it at that level on this type of trust system??
That had me intrigued, so doing more research, this article goes in depth on the various types of lenders, the borrowers as well as their motivations, and the collaterals involved: https://www.accaglobal.com/content/dam/ACCA_Global/Technical...
And some top US based companies at the moment: https://www.forbes.com/sites/oliviergarret/2017/01/29/the-4-...
Still haven't read enough to form a solid opinion, but it is an intriguing space. I definitely see the value in providing capital and easier access to capital to people who probably never had the opportunity, but the space seems ripe for fraud, manipulation, high defaults, etc.
[+] [-] aphextron|7 years ago|reply
That's cute. LendUp is charging upwards of 900% APR on short term loans [0]. Usury is nothing new, but until the "disruptive" tech economy picked it up, it had been mostly regulated and outlawed.
Turns out fleecing poor people for everything they have is profitable enough for people to not care.
[0] https://www.lendup.com/rates-and-notices
[+] [-] Xixi|7 years ago|reply
But keep in mind that interest rates should always be compared to inflation. Lots of developing countries have inflation >10%.
[1] https://en.wikipedia.org/wiki/Kiva_(organization)#Interest_r...
[+] [-] majani|7 years ago|reply
[+] [-] xjia|7 years ago|reply
Based on what I know, a large portion of the loans have very small amount and short duration. For instance, people want to borrow 1000 CNY for a month and pay back 1020 afterwards. That's already 2% per month.
EDIT: The reasons they need such loans are more complicated. Some needs money for emergency. Some uses the money to buy stock/cryptocurrencies...
EDIT2: P2P platforms typically take money from the deep pockets and subdivide into tiny loans. They earn the interest rate difference (e.g. 20% from users vs 15% to capital providers).
> high defaults
Empirically the default rate is very low. People pay back on time if you call or just text them. Honestly if they don't pay, it's totally fine, and the P2P platforms just don't care, because they earn so much money...
[+] [-] numbers|7 years ago|reply
As a lender on Lending Club, I don't recommend it. The returns are worse than a bad year on the stock market holding ETFs.
I've stopped lending on there and now I'm just waiting to move my money elsewhere.
[+] [-] ndesaulniers|7 years ago|reply
[+] [-] jcbrand|7 years ago|reply
In 2008 the stock market fell 50%.
The last 10 years we've not had any bad years in the stock market, largely due to trillions of dollars of money printed by central banks in order to prop up the markets and to create a so-called "wealth effect". Expect a reckoning in the coming years.
[+] [-] pembrook|7 years ago|reply
As MPT states, as long as the returns are un-correlated to the stock market they can improve the risk-adjusted returns to a portfolio. Even if the return is lower (but still positive).
[+] [-] ajross|7 years ago|reply
I mean, the description of the business model sounds like it's a bunch of transactional companies like ebay or paypal or whatever. Those might be expected to "fail" if the overall market shrinks, if expected growth didn't arrive, or if they get beaten by a competitor. But they don't fail "like dominoes". If anything the exit of one player would be expected to strengthen its competitors.
But the headline and analysis is using terminology that make this sound like a credit crisis. Is it?
[+] [-] JumpCrisscross|7 years ago|reply
From the “people that are running these P2P companies don’t actually understand what P2P really is,” these sound more like badly-run Prospers than true P2P lenders.
[+] [-] TylerE|7 years ago|reply
[+] [-] pishpash|7 years ago|reply
"Shakeout’s impact on the financial system has been limited" -- because bond holders are individual investors; it will depress future demand, but no systemic risk.
[+] [-] rdlecler1|7 years ago|reply
[+] [-] adventured|7 years ago|reply
It's also fascinating that China would install a dictatorship right as this switch-over - from organic growth to extreme debt - was occurring. I'd wager the Communist Party is terrified of what's coming socially, and given their overwhelming vote in favor of the dictatorship they think that power is going to be necessary to control the people (they very knowingly voted to clamp down on all human rights in the country by handing Xi that position).
Since 2011 they've taken on tens of trillions of dollars in new debt. As recently as 2008 China's debt to GDP ratio was reasonable. Their debt to GDP ratio has drastically worsened since and is very realistically the worst among major economies now (when their immense shadow debt is included it's a certainty). Household debt to income ratios have similarly gotten dramatically worse in the last decade. There are in fact limits to how far a nation can push such things.
Somewhere between 1/4 and 1/3 of their new GDP every year is going just to new debt interest payments. When you consider what else needs to come out of that new GDP, that's a very stark debt situation. In 2011 they also weren't seeing record bond defaults.
The types that cry wolf are often early or very early in their predictions. One has to ask if there is in fact any truth to what they're saying, instead of only focusing on their regularly saying it. In the end, they may be too early in their speculation, rather than entirely wrong.
China should have accepted slower organic growth and maintained their financial health. They chose the Japan approach of levering up massively on debt when the growth dropped off. They're so terrified of their own people about what happens if growth is 2% instead of 6% (being terrified of their own people is also why they installed the dictatorship to control them). It tells you all you really need to know about their system, it's fragile and can't survive a recession or stagnation.
[+] [-] duxup|7 years ago|reply
[+] [-] arbuge|7 years ago|reply
Even for a large nation like China, 2,000 P2P platforms sounds like orders of magnitude more than what is actually needed.
[+] [-] pjc50|7 years ago|reply
[+] [-] kawfey|7 years ago|reply
Now I am not so sure.
[+] [-] toomuchtodo|7 years ago|reply
As a borrower, it might not be a bad deal if you can't get a loan secured by real estate, or a personal loan, to refinance high interest debt. Depending on your circumstances (debt to income ratio, outstanding debt, available credit, income), you might consider using balance transfer offers that get you credit at 3-5% to make headway on high interest debt.
For a wealth of anecdotal, self-reported experiences, checkout Reddit: https://www.google.com/search?q=reddit+investing+p2p
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