What is P2P and marketplace lending?
By Terence Wong, HWL Ebsworth Lawyers
In recent times, record profits in the banking sector come amid borrowers and investors finding value in an alternative form of finance that does not necessarily involve a bank.
This article introduces "peer-to-peer" (P2P) lending and "marketplace lending", makes some comparisons to "traditional" banking, discusses regulatory protection issues and explores the regulation of P2P and marketplace lending intermediaries in Australia as regulated managed investment schemes and consumer credit providers.
What is P2P and marketplace lending?
P2P lending transactions involve borrowers and lenders both essentially acting as customers with an intermediary known as a P2P lending "platform" that facilitates loans to borrowing customers and investments from lending customers.(1) For example, a solicitor's mortgage practice could be seen as a previous version of P2P lending that involved a solicitor introducing investor clients to borrower clients, thereby bypassing the banks.(2) While the loans and investments under P2P lending will usually be separate transactions with a platform intermediary, they will typically be linked so that the investor's return is dependent upon the performance of a particular borrower or group of borrowers.
"P2P" is an acronym that is applied to activities, coordinated over the internet, between participants in a group network of "peers"; hence "peer-to-peer". P2P networking has been used since the 1960s, of which the internet itself was originally a subtype. P2P began as a computing model used by Advanced Research Projects Agency Network (ARPANET) in 1969 and Usenet in 1979 in which "peer nodes" collaboratively performed a computing task. Such activities now include:
- providing services as a group to users (eg "wisdom of the crowd" forums for those seeking advice from a crowd over the internet),
- sharing payment services among a group of participants (eg Bitcoin's blockchain network verification)(3) and
- transferring items within a group (eg P2P file sharing).
Transferring or sharing computer files within a group was an early application of P2P which sprang to notoriety with the creation of Napster in 1999.
The collaborative performance of group tasks by peers spread across a network can be seen to eliminate the need for a "centralised governing node" (eg bitcoin can be seen as removing the need for a central bank payments system). Similarly, to the elimination of a centralised governing node under P2P networks, it is the bank's involvement in a consumer lending transaction that can be seen as eliminated and replaced by a P2P lending platform that matches investors to borrowers.(4)
P2P lending is seen as a potential disruption to the business of banks and certain finance companies that are considered to be the traditional providers of consumer loans. P2P lending is well described by an Australian platform, DirectMoney, as:
... all about people ... P2P lending, in the true sense of the concept, implies that individuals are transacting directly with each other. This definition is becoming somewhat redundant, as the largest platforms in consumer lending, including US companies like Lending Club and Prosper, and UK's Zopa, are now seeing more investment by institutions rather than "peers" ... The lone retail (or "mums and dads") investors are becoming history, as the big players see the benefits of the industry. This outcome has led to many of the P2P lenders preferring the name of "marketplace lenders"[.]
Therefore, for simplicity, the remainder of this article will use the term "marketplace lending" to replace and also contain the term "P2P lending".
In the US, marketplace loan origination has doubled every year since 2010, to $12 billion in 2014. Meanwhile, the trend is playing out globally, notably in Australia, China and the UK. All-told, such lending could command $150 billion to $490 billion globally by 2020.
Morgan Stanley also reported marketplace loan issuance in Australia as having grown from $300 million in 2013 to $500 million in 2014.20
Market participants appear to be positioning themselves to profit from an early position in regard to growth potential in Australia's young marketplace lending industry. RateSetter and ThinCats made moves to enter the Australian market from the United Kingdom in and around the 2014/15 financial year.(5) DirectMoney has listed on the Australian Securities Exchange in or around July 2015. At the time of writing, MoneyPlace was "launching soon". SocietyOne has been seeking a licence to offer investments to retail investors for some time. In April 2015, Lending Hub announced that it would relaunch. iGrin, reportedly Australia's first P2P lender, has been announced to be relaunching but has not yet reappeared at the time of writing this article.
It seems, in Australia and globally, the level and complexity of investor protection and consumer credit regulations is not strongly hindering the spirit of entrepreneurs seeking to take a foothold in the rapidly growing industry of marketplace lending. The effects of any disruption to the relative strength of the banking industry (apart from as a mere possibility) are yet to be significantly reported.
(1) Lenders and investors are used interchangeably in this article depending on the context in which each term is used. For the purposes of P2P lending, they are the same participant.
(2) See Nicola Howell Solicitor lending to consumers: a study of interest only loans and asset-based lending practices in Victoria (September
2004). Marketplace lending platforms now operate in an environment that allows for clever management of data through complex algorithms, more comprehensive credit reporting standards and increasingly sophisticated approaches to the pricing of risk.
(3) See Terence Wong "Bitcoin deconstructed: Part 1 -- Concepts and signposts" (2014) 30(4) BLB 70.
(4) Although this does not necessarily remove bank involvement. See James Eyers "Westpac buys into first peer-to-peer lender" Australian
Financial Review 6 March 2014.
(5) See SocietyOne, P2P Pioneer Society One Presses Advantage, 6 March 2014, www.societyone.com.au. Although, ThinCats is initially only targeting the "peer-to-business" or "P2B" market for loans to small and medium-sized enterprises.
Note: This is an extract from Australian Banking & Finance Law Bulletin, September 2015, Volume 31 No 8