Strengths, Weaknesses, Opportunities and Threats of the Peer to Peer Lending - Case Study Example

Peer to Peer Lending {Name} {Tutor} {City} {State} {Date} Table of Contents Peer to Peer Lending 19 1 Peer to Peer Lending 2 1.0Introduction 2 2.0 How P2P works 3 3.0 Merits of P2P Lending 4 4.0 Disadvantages of P2P lending 5 5.0 Risks Involved 6 6.0 Pro and Cons Related to P2P 6 7.0 Loan Auction 7 8.0 Loan Approval 8 9.0 Interest rates and the Repayments 9 10.0 The Guarantees and Securities 10 11.0 Sourcing Funds 10 12.0 Industrial Regulations 11 13.0 Making Right Choice for P2P lender’s Site 12 14.0 The P2P Legit Sites and their Risks Mitigation Procedure 12 15.0 P2P Post-Crisis 14 16.0 P2P SWOT Analysis 14 17.0 Current Status of P2P in Australia 15 18.0 Customer Acquisition Challenge 16 19.0 Conclusion 16 Bibliography List 18 Peer to Peer Lending 1.0 Introduction The P2P lending is a form of hybrid that allows saving and investing and can offer high returns that are different from the traditional conservative methods. This form of financing is gaining popularity among the investors who are more inclined hugely on the on P2P than the previous old savings accounts used to offer them. The act of acquiring huge returns in every potential investments to accrue bigger returns on the relative amount deposited can be enticing and tempting since it does not give the same results for every member who tends to invest. The challenges for the P2P lending requires enlighten and enough knowledge to allow you be able to evade the pitfalls during the period of investment. The site offering the peer to peer services are run online, therefore, they rarely incur overheads giving them the ability to offer services that are way to cheaper compared to the traditional financial service providers (Sonenshein, Herzenstein and Dholakia, 2011). Due to this act, the lenders are in a position to earn a bit higher returns above the savings, as well as the invested goods that are offered by the banks. The borrowers also are on the liberty of borrowing more money that accrues lesser interest rates, which is after the P2P site has already deducted their fee for allowing you to use their services to get a platform that matches your needs and allows you to check credit for the borrower. This scenario can be defined as having the banking services where there is no bank. The services are also referred to as the crowdlending and the P2P loans are unsecured but the larger amounts are at times lent to particular organizations (Bruton et al., 2015). At times, the secured loans are offered for high value commodities such as the jewelry, aircrafts, watches, business assets, fine arts, and vintage cars that are used as the collateral for lent amount. This report will analyze the P2P industry in a general view of its strength, the weaknesses, the opportunities it presents, the threats encountered on the process of offering and receiving the services. 2.0 How P2P works The peer to peer lending is somehow not understood how it works leading to many people making great losses on the process of making uncertain steps. In this section we explain a bit of how the P2P services are offered. The lenders continuously put their savings in the account that is used to loan the borrowers the amounts that everyone specifies. They on return get the good interest revenue that is preset and at times can be set by the lenders depending with the demand and supply forces that exists variably in the market. The type of the people that the lenders prefer can also be preset to hinder the unwanted target groups. They always use the credit ratings and pick on the ones with the excellent ones for anticipated inference in loan repayment at the given interest rates without failure. They lenders are also capable of setting their interest rates depending on the risks assessment for the various clients depending with the previous repayment experiences a characteristic that is coined by the ratings that range from excellent, good, to a fair rating that are awarded similar and inferred risks. For instance, the client that has the highest risks is awarded a higher interest rate to ensure the risk is managed at the ground level. The lenders then decide on the amount that every applicant deserves and allocates them accordingly in the P2P site. The loans are broken among several borrowers to ensure that the risks are divided among the borrowers in a bid to reduce the chances of failing to be compensated. However, the lending sites have investments that are “ring-fenced” to ensure that there is a way out in case the site itself busts they have some stock to bail themselves out when the borrowers fails to honor their agreements and payment terms (Bruton et al., 2015). 3.0 Merits of P2P Lending The P2P lending site has their advantages for both the lenders and borrowers as a whole. If you decide to invest in the sites, you are likely to get a double interest on the amount staked. The usual savings rates doubles on the process, therefore, offering you more revenue on the little you have deposited. The existence of the lending services is rejuvenated by the fact that the applicants are subjected to a rigorous credit scrutiny to avoid lending to loans terms violators. This leads to the selection of only serious borrowers who will eventually pay back within the stipulated time; therefore, this alleviates the chances of a bust and loss of investors’ money. Also, the lenders are certain of their preset interest revenue bars. The filtering of only responsible borrowers narrows the risk margin allowing more revenue in the dealings, since only a small percentage of the borrowers who applied are approved. The P2P sites are allowed to operate only if they have the ability and mechanisms of chasing the loan defaulters, and also have the money “fenced” to allow the lenders to reimburse their services without harming the investors. It is much easier to get the money through the P2P sites as long as you have healthy credit rating and a good history of your previous loan requests, but it is subjected to some fees. The lending sites are regulated by Financial Conduct Authorities that is aimed at protecting the both lenders and borrowers as it is done with the current traditional banking service providers. At agreed status, the P2P offers tax – free interests for its clients for an agreed period through their Innovative Funding ISA. 4.0 Disadvantages of P2P lending There are challenges that are presented by the P2P lending. For instance, your money is never protected and guaranteed by the states government unlike other normal savings where the institutions are subjected to the authority of the country where the government can cater for paying the money that has been defaulted on the behave of the banks. Therefore, for the P2P lenders, if things go south and the site collapses, all your savings are lost. The investors are charged the service fees that are reflected through the interest rates that are varied among the site users. For all the money that is received away from the ISA you will still have to be taxed implicating that you will be subjected into double taxation which does not augur well for economists and investors. This implies that for the interest that is earned on the P2P loans, you have to calculate the returns by using the status of your nation’s taxpaying system among other interests that are accumulated. The banking experts have termed this as the most risky mode of making your saving compared to the traditional methods that are globally known (Bruton et al., 2015). 5.0 Risks Involved There are several risks that are associated with P2P despite its pioneers trying their best to nullify the rate of risks. So far, it is the most risky way of making savings as a regular account. It requires the users to go into it with the necessary information for backup in case of dire event they have their way to maneuver out of it. However, most people indulge after being lured by the high bids of prospected huge revenues without keeping the in mind that they can lose the sum in a matter of seconds and there is no well-defined legal recourse that can be used to pursue your money back. Additionally, the P2P roll out is at its nascent stage where most of the innovative models are not yet tested and analyzed in the due time to give their accountability in securing the money that is entrusted to the sites. Therefore, there are chances where issues crop up during the process of waiting for the maturation of the interests. The only remaining safe solution is to be able to realize the risks and spreading them among several sites, as well as using differentiated saving alternatives to ensure you are protected and not over-exposed to the presented risks that are not protected. Other factors that pose risk of losing the investment are the operator insolvency, the interest rate fluctuation, the property market instability, and lack of cover by the FSCS that chips in to compensate the client in case of eventualities (Sonenshein, Herzenstein, and Dholakia, 2011). 6.0 Pro and Cons Related to P2P It is absolutely true that the P2P lending business is the latest news in the banking and investment sector. Most experts still believe that P2P has the potential to kick start the savings economy and it is expected to have coined in $55 million within the first one year of trial of the innovation model that has been rolled out. Even if the P2P is still at its early stages, it has already shown some significant impact on the small businesses that have been funded through this process. The P2P mindset is already making millions of dollars in a week despite the fact that it is on its advancing stage, it is starting to stream revenue into the lenders pockets. The pros of this type of banking are that you are in a position to acquire very high rates compared to other traditional modes of account savings. This site offers the best when used as a savings account. When using this kind of investment, you are in a position to diversify the places you always stream your money to make them earn you more revenue. Here you lend money to other borrowers at the comfort of your home and start enjoying the huge profits that are accrued. Additionally, you are liberty of withdrawing your money whenever you want it and the best thing is that you can invest in a tax-free niche. The ISA helps to ensure that the investment and the returns are not taxed (Riggins and Weber, 2011). Among the cons of the P2P lending is that they tend to harbor the highest level of risks. One of the major problem is that your money is never under the protection of the FSCS (Financial Services Compensation Scheme). The FSCS act to protect the lenders in case of the site busting, although it rarely happens it is better to have caution for a bad day events. This is not a huge threat because you are at liberty to withdraw the cash whenever you detect some pitfalls to save your face. The other challenge is waiting for your money to be lent after you pay it to the P2P ‘pot’. This is dependent on the availability of willing borrowers availability. The waiting period you do not earn anything as far as the interests are considered. Finally, in case of a loss, the lender takes the blunt end foe all the unpaid loans. The lenders are entitled to be responsible for the follow up of all the unpaid loans. You have to hire a loan facilitator in cases of default to be able to handle the paper work and other professional chasing of the defaulter. 7.0 Loan Auction This is a process that is used by the P2P to parade the successful borrowers in their intermediary sites where the willing lenders place their bids ion the borrowers they wish to invest upon. The willingness is subject to the factors objected above where the rating and credit score plays a bigger role. The lenders bid on the borrowers quoting the specific amount that they are willing to finance the borrowers with, and also they have the freedom to quote their potential interests that they expect their investment as the returns. The force of demand and supply is left to take role, where the high number of bids on a particular client leads to the decline of interest rates in the favor of the borrowers. The managers have no influence to the rates that are imposed. Since every lender wants to get some interest later in the day, they will endeavor to give lower interest rates to influence the selection of their bids by the client in question. Therefore, when the bidding time lapses, the borrower has the liberty to select the lender of their choice. Most preferably the one with lower and considerable terms of lending such as the repayment period in addition to the interest rates. Mick Collins the founder of secure archives once seek to secure a loan to beef up his storage capabilities from the FundingKnight where he was funded with 40% within a day from the same site. Therefore, after the borrower accepts several or one bid of the financed options, they are expected to wait for three business days before the money can be deposited in their banks. The intermediary is the one that now mediates the lenders and the borrowers in ensuring that the communications are done on a timely manner to ensure that the monthly payments are duly done within the agreed time (Riggins and Weber, 2011). 8.0 Loan Approval The loan approval is screened thoroughly as mentioned above depending on the credit score and the ratings that the client has accrued from the previous loans they have successfully acquired and paid back. When applying for a loan from the regular banks you have to wait for close to a month or two, but with the P2P is a different case where the applicant waits for at least three weeks at most to receive the money they accepted as bids from the lenders. The P2P involves only three stages for the borrowers to receive the funds after their approval: the application and approval, gets listed after the opportunity, and finally receiving the money promised to be reimbursed. Therefore, the whole loan application and receiving the money hardly consumes a month unlike for the traditional banks where the applicants undergo rigorous efforts to be approved only to finally receive the funds late and sometimes what they never bid for is not fulfilled. However, the P2P has to ensure that they invest their deeper scrutiny on the borrowers since the quicker the approval and processing of the applications can be erroneous leading to unfathomable losses where the business is left saddled and paralyzed never to pick up again. Robert Warlow warns of the dangers that lurk around shoddy and uninventive scrutiny of the loan applicants which can lead to bad debts (Heng, Meyer, and Stobbe, 2007). 9.0 Interest rates and the Repayments The interest rates are very competitive for they are controlled by the forces of demand and supply on the P2P sites. Roughly, the interest rates starts from 6%, which is the standard lever and it is subject to negative or positive fluctuation depending with the bids placed and the number of loan applicants that are available. The interest rates are also controlled by the lenders depending with the credit history displayed by the applicants. The ones with poor credit scores are subjected to higher rates to mitigate the risk of losing the loaned amount, and for those with higher credit scores are awarded considerable interest rates that are meant to entice them to continue repaying within the agreed time lapse. The manager of the starling capital says that the current rates are raging between 9-15% since the arrangement fees are a bit higher compared to the traditional banks loaned amount. During the repayments, the rates are fixed and the borrower is not subjected to fluctuating and accumulation interest rate as time goes by. The early repayments are not charged and it is actually encouraged to ensure your credit score is not negatively impacted. The repayment periods may be shorter compared to the typical banks for it can range between 3 to 5 years after the application approval. Therefore, the shorter repayment period piles more to be paid amount charged monthly, and this usually is associated with piling unnecessary pressure on the firm’s cashflow (Aitken, 2015). 10.0 The Guarantees and Securities The P2P sites are termed notorious of not asking for more intensive and detailed higher levels of security and other personal guarantees compared to the traditional banks procedures. The P2P accumulates what is there as their security for they are not used to rigorous guarantees from the borrowers. But also you may be at a stage be asked for more details about your location and other directors of personal assets to serve as the guarantee. Therefore, when on the process of applying for the P2P services the business may decline to offer security by specifically enlisting the businesses that are not subjected to giving securities to the lenders. This is better for the lenders are aware that they are lending to such at their own risk for they are not protected. This way the lenders will still operate with such businesses with a much higher interest rates due to the higher scale of the involved risk. The applicants that have adverse credit scores are sidelined by lenders, while those with a healthy credit history tend to have preference for its inferred that they will respect the rules that are put in place describing the repayments and interest rates. However, the lenders have varied risks appetite implying that others may consider lending a poor credited borrower with a higher rates anticipating for accumulated returns on the long run (Davies, 2016). 11.0 Sourcing Funds The P2P industry is at its nascent stage and relatively new in its operations. This poses a risk to the potential borrowers. The sites receive buoyed financing from the Funding Cycle, as well as Zopa giving the industry its flamboyant market entry. This is the reason behind the mushrooming P2P sites online day in day out. This gives a reason to wary of the impending causalities as the industry expands and matures over tome. Even if the borrower do not lose their actual money, but they suffer the lack of funding loans lending to the delay of their business and hence suffer the most lethal impact of P2P site failure. Therefore, much caution and regulation of the establishment of online P2P sites should be regulated and more security measures inflicted (Chen, Lai, and Lin, 2014). 12.0 Industrial Regulations The P2P is exposed to the largest risk since it lacks regulation as other industries are protected by globally agreed legislature. However, the risk is shifted towards the lenders more compared to the borrowers who rarely suffers and serves as the determiners of the growth of industry by repaying their lent money. The only thing that the most of P2P sites require to approve an applicant is their Consumer Credit Licenses that is obtained from the Fair Trading Offices. This is enough to alleviate the applicants’ further scrutiny and the stringent measures that are incurred in the traditional banks when seeking an approval for a formal loan. Some of the P2P sites are members of the P2P Financing Bodies that take charge of repaying its clients in case the industry pleads bankrupt and they are mandated to operate within the safe bounds to avoid bad debts and numerous pitfalls (Belk, 2014). The governments announced their involvement to be controlling the lending P2P sites from 2014 where they established avenues of ensuring more sensitive approval procedures and lending standards. The move is well embraced for it has helped beef up the responsibilities and reputation of the industry by enhancing their credibility in service delivery. However, the industry will not allow the altering of the lending and borrowing statuses by any third party. The only issues that is at stake is the regulation, which the government has already taken charge. If this manipulation is allowed, it will compromise the objectives of the industry by turning it into the obvious traditional banks that have been operating for a long time. The objective is to let the lenders and borrowers to rule themselves and make their own decision that seem fit for their interests (Milne and Parboteeah, 2016). 13.0 Making Right Choice for P2P lender’s Site There are various sites upon which you are to make the best choice when selecting which to use their services. The principles are generally similar across the board except for some varied differences that makes each site unique and hence their parallel co-existence since they are competitors doing their business for self-gains. The only determinant of how a site serves you the best is the information you are willing to present to them and the professional interaction between the lenders and borrowers. A good experience calls for more business deals in the future. So offering the reasons for you borrowing such as an executable business plan allows the lenders to lend you even more. You develop a long time relationship that yields the best lending services on the platform of your choice. Also, the rate with which the borrower’s responds to the questions that are raised by the lender plus the honesty displayed makes the selected site your best. This is so because the personality determines the extent a lender believes in your borrowing reason and the more lenient the rates will be for the lent amount. Therefore, the personal conduct makes the any site accommodative and serves the purpose being pursued as at now (Moenninghoff and Wieandt, 2013). 14.0 The P2P Legit Sites and their Risks Mitigation Procedure 14.1 Funding Circle It offers loans that range from $5, 0000 to the upper limit of $1 million to all the limited liability companies and partnerships. They operate on the $100, 000 turn over at the minimum. The site requires the personal guarantees for the loans that are above $100, 000 or higher amount that also calls for the assets security and guarantee. He site charges an arrangement fee of about 2 to 5% of the loan value being negotiated. 14.2 FundingKnight This site was founded in 2011 and it lends at minimum of $25, 000 and it is capped at $150, 000 to all the well established businesses. Borrowers pay a charge fee of 2.5% of the loaned amount. They also add a repayment fee in very transaction done and there is an extra charge of 0.5% annually (Micic, 2015). 14.3 Rebuilding society It is the newest in the market. It funds businesses that have good records for a business that has been on operation for the last two or more years. Offers both secured and unsecured loans at the range of $2, 000, and $250, 000. The charge a fee of not less than 5.9% for the services. 14.4 Zopa It is the most famous with more than one million members who have lent not less than $479 million since its inception. The site is strict for it only approves applicants with a healthy credit record, those who are low risk clients, and they always repay on a timely manner. The fees charged ranged between 7% and 10% of the total amount that an applicant needs. 14.5 ThinCats.com It has the largest range of the probable lettable amount: $50, 000 to $3 million. They require the borrowers to repay in a fixed monthly bits that are agreed upon the approval stage. The loaning dwells between five years or just six months (Everett, 2015). 15.0 P2P Post-Crisis The P2P industry platform is device to service both the lenders and borrowers with a platform where they can interact by offering money and borrowing respectively. The lenders were subjected to a crisis during the 2007-2008 economic recession where very low rates were effected. The investors had nothing more to do but only to seek other more sources of constant higher revenues. This was the worst of the pitfalls that almost saw the online lending collapse as the investors were scared off and had to retract their paths. The capitalization on the momentum the company has led to the laying out of the initial offering of the stock to ensure continuous delivery (Stokes et al., 2014). 16.0 P2P SWOT Analysis 17.0 Current Status of P2P in Australia Currently the largest numbers of P2P customer are from Australia who is taking advantage pf the easy loans to expand their small and medium businesses. The amount of money they have lend is expected to hit $22 billion in the next five years to come. The big banks are said to be exploitive with rigorous application process since the interest rates are higher, triggering the residents to adopt the new innovativeness that comes with the dynamic technology. According to Morgan Stanley, the P2P residents will his a consumption of $10.4 billion which is approximately 6% of the lending consumers of the greater Australia (Murray, 2015). Additionally, the online lending service to the small businesses is yet to grow to closer to $11.4 billion under the same predicted time and the growth rates are expected to sky rocket due to the financing of the SMEs. In Australia, the P2P lenders are initiating institutional growth by funding them with less rigorous quick loans by also offering an online platform where the borrowers and lenders are intermediated to meet their preference. The SocietyOne was launched in 2012 and the mandate was to ultimately raise the lives and capita for the retails investors for them to expand their product lines with sufficient funding. However, the P2P efforts are limited by the oligopolistic nature of the Australian banks who are trying to replicate the idea of technology to be able to compete with these sites (Meyer et al., 2007). 18.0 Customer Acquisition Challenge The rate of borrowing from these sites is influenced by the interest rates as it was pointed out above. The force of demand and supply maintains the availability of the consumer that the site offers. The conversion rate also determines the influence on the customer base for every lending site. There are plans to inflict strategic alliances that are aimed at soliciting for clients, both the borrowers and lenders as a whole. For more clients, the intermediaries should at least base on secured loans to allow the customers to have confidence in sites. The business should uphold the sustainability through a model that offers a real life scenario and results achievement. However, the base is growing more stable as many clients are considering the P2P services due to the long procedures involved in the traditional banks, and the love waiting for the disbursement for almost a month on two (De Vinck and Lindmark, 2012). 19.0 Conclusion The insurgence of the online lending is unabated and it is yet to grow more relevant to the audience depending with the personalities. The lenders should be in a position to offer relative rates to those with a healthy credit history. For trust to be hiked, the borrowers should answer all the questions asked by the lenders to ensure that they are on the same slate, and to encourage a harmonious online investing and business funding. The borrowers should present guarantees inform of a business plan or personal assets to be able to win the lender’s trust and favorable terms. The P2p has to improve on the weaknesses highlighted by operating under the national regulations to ensure that in case of a pitfall, they both lender and borrower are at a safer side away from the repercussions that are associated with a collapsed firms. The online banking and investment is gaining popularity that cannot be stopped. The technology is making the lending and repayments easier and achievable. Bibliography List Meyer, T., Heng, S., Kaiser, S. and Walter, N., 2007. Online P2P lending nibbles at banks' loan business. Deutsche Bank Research, 2(1), pp.39-65. Everett, C.R., 2015. Group membership, relationship banking, and loan default risk: the case of online social lending. Banking and Finance Review, 7(2). Moenninghoff, S.C. and Wieandt, A., 2013. The future of peer-to-peer finance. Zeitschrift für betriebswirtschaftliche Forschung, pp.466-487. Belk, R., 2014. You are what you can access: Sharing and collaborative consumption online. 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Entrepreneurship Theory and Practice, 39(1), pp.9-26. Aitken, R., 2015. Everyday debt relationalities: situating peer-to-peer lending and the rolling jubilee. Cultural Studies, 29(5-6), pp.845-868. Davies, J., 2016. Who offers peer to peer lending in Australia?. Equity, 30(1), p.6. Murray, J.S., 2015. Equity crowdfunding and peer-to-peer lending in New Zealand: The first year. Available at SSRN 2595354. Milne, A. and Parboteeah, P., 2016. The Business Models and Economics of Peer-to-Peer Lending. Available at SSRN. Micic, I., 2015. Crowdfunding: Overview of the Industry, Regulation, and Role of Crowdfunding in the Venture Startup. Anchor Academic Publishing (aap_verlag). Stokes, K., Clarence, E., Anderson, L. and Rinne, A., 2014. Making sense of the UK collaborative economy. Nesta. De Vinck, S. and Lindmark, S., 2012. Statistical, Ecosystems and Competitiveness Analysis of the Media and Content Industries. Read More