Person-To-Person Lending: Is Financial Democracy a Click Away?
This paper explores different person-to-person (P2P) platform models, their outreach and potential for scale in the future, constraints to their growth and new issues which may arise with the growth of online P2P lending. These platforms help expand access to finance for the unbanked, reduce unnecessarily high interest rates and democratize both, developed and developing country credit markets. Beginning with Zopa in the U.K. in March 2005, P2P internet sites began serving as intermediaries between borrowers and lenders in several developed economies. The P2P lending market has expanded internationally, extending virtual communities and linking lenders in developed countries to borrowers in developing countries. For micro, small and medium enterprise (MSME) lenders and MFIs, the growing success of the P2P marketplace presents an opportunity to increase access to capital and diversify funding sources by attracting a new investor class of small, socially motivated investors. Finally, while the P2P lending space has shown signs of quickly adapting to market changes, and broadening access to financial intermediation, its constraints, such as regulatory hurdles, limited and inconsistent transparency of information, and marketing challenges could stifle industry growth.