Peer-to-Peer (P2P) lending in the FinTech industry has become an increasingly important source of funding for both individuals and businesses in the UK. P2P lending is a fast growing industry where online platforms match borrowers directly with lenders. It is particularly appealing to smaller businesses. Those using P2P lending are able to experience an often improved experience through the use of technology to assist with the process. P2P lending is now a feasible alternative to more traditional financial arrangements as it allows businesses and individuals to lend money to others without the use of a financial institution as an intermediary. P2P lending has become one of the hottest industries in FinTech, growing globally at a very fast rate.
How does P2P lending work?
The model for P2P lending is very simple - an individual or business signs up to a P2P lending site as either a borrower or a lender. To assist individuals and businesses that are wishing to pursue P2P lending, there are various sites that act as administrators. These sites can assist in bringing together those that wish to lend and those that wish to borrow via this method. The borrower will submit an application form detailing their loan requirements. This is assessed by those running the site and results in a credit rating, confirmation of how much they can borrow and the appropriate interest rate. This whole process can be completed in just a few minutes or hours. Investors are then able to fund the loan. Often those lending the money will invest in several different loans so to spread their risks. P2P funding is governed by the Financial Services and Markets Act 2000 and is regulated as an "activity of operating an electronic system in relation to lending" and requires FCA authorisation.
Advantages of P2P lending
The use of P2P lending means the removal of banks and other financial institutions. This results in lower interest rates for borrowers compared with taking the same loan out with a bank or credit card. Another attractive element of P2P lending is the fact that there are fixed rates (even if there is late payment) which can be very appealing compared to other forms, such as credit card loans.
The whole process is much faster than traditional lending processes and is transparent and easy to understand. Customers enjoy the ease of the process being digital and this explains why the growth in this area has been so rapid. Particularly in the FinTech industry, the fact that the whole process can be dealt with digitally is very appealing for many looking at financing options.
There are fees associated with using P2P loans but these are generally lower than the other options that are possible. There is also generally not a penalty if you wish to repay a loan early which is often appealing to borrowers.
Several sites have an emergency fund that covers any shortfalls that arise from bad debts in your portfolio with them. The debts are covered so long as there is money in the fund, however, there are limits on the funds that can be recovered.
Disadvantages of P2P lending
Although P2P lending offers a lot of attractive elements, it is not without issues. It is not the same as a savings account in a bank and does not offer the same protection. This is particularly important for the lender who shoulders all of the risk. It is therefore very important that any lender assesses the credit rating process before agreeing to offer loans as an investor.
If there is a financial disaster then this form of lending does not offer the same protection that is offered by organisations such as the Financial Services Compensation Scheme for banks. There are, however, certain safeguards in place to protect the parties involved. P2P sites in the UK are now regulated but if they go bankrupt there is no compensation scheme covering those involved.
The advantages of P2P lending really only applies if the lending is for a reasonable period of time (around 1-5 years). For periods less than this, it may not be a beneficial route and if money is withdrawn early it could result in the loss of a lot of interest.
There are a variety of P2P lending sites and each one has slightly different amounts of risk. The sites will detail the rates that are offered by different peers as well as their reputation. The sites also charge a fee, which needs to be taken into account when comparing the rates offered against those provided by banks.
For sites that offer the shortfall fund, if a lot of bad debts accumulated at once then the site may not be able to cover them all and the shortfall would not be covered. Smaller lenders also do not offer these emergency funds to cover if there is a shortfall.
Although there has been massive growth in this area, it is still a young industry and it is too early to say whether the lower rates and other advantages are something that will definitively remain in the future. It is unclear at the moment how banks will respond to this form of competition and what will happen in the global financial market generally in relation to interest rates.
Contact Selachii's FinTech Lawyers, London
Compliance with the legal framework underpinning P2P funding can appear daunting and our expert solicitors can provide clarity and support. If you are considering P2P funding, contact our highly experienced FinTech lawyers for legal and commercial advice.
We offer the same level of experience and expertise as you would expect to find at a large city law firm, with state-of-the-art case management technology. We will assist you with every aspect of regulatory compliance, from updating current practices to understanding your legal requirements in P2P funding. At Selachii, we have a wealth of knowledge and experience in assisting platform providers access this emerging market and understand current trends and anticipated developments in the regulatory regime. We provide forward-looking legal advice specific to your business needs and will be on hand to provide pragmatic and holistic solutions to the challenges faced by your business. Our team will help ensure your ongoing compliance with P2P regulations and keep you up-to-date on upcoming changes and opportunities in this industry.
If you require advice on P2P lending within the FinTech industry, then please contact a FinTech lawyer at Selachii today for expert legal advice on 0203 811 3004 or complete the online form to arrange a consultation.
