The Business Models and Economics of Peer-to-Peer Lending

ECRI Research Report, 2016, No 17

35 Pages Posted: 13 Apr 2016 Last revised: 9 Oct 2016

See all articles by Alistair Milne

Alistair Milne

Loughborough University - School of Business and Economics

Paul Parboteeah

Loughborough University - School of Business and Economics

Date Written: May 5, 2016

Abstract

This paper reviews peer-to-peer (P2P) lending, its development in the UK and other countries, and assesses the business and economic policy issues surrounding this new form of intermediation. P2P platform technology allows direct matching of borrowers and lenders diversification over a large number of borrowers without the loans having to be held on an intermediary balance sheet. P2P lending has developed rapidly in both the US and UK, but still represents a small fraction, less than one percent, of the stock of bank lending. In the UK – but not elsewhere – it is an important source of loans for smaller companies. We argued that P2P lending is fundamentally complementary not competitive too conventional banking. We therefore expect banks to adapt to the emergence of P2P lending, either by co-operating closely with third party P2P lending platforms or offering their own proprietary platforms. We also argue that the full development of the sector requires much further work addressing the risks and business and regulatory issues in P2P lending, including risk communication, orderly resolution of platform failure, control of liquidity risks and minimisation of fraud, security and operational risks. This will depend developing reliable business process, the promotion of as full a degree as possible of transparency and standardisation and appropriate regulation that serves the needs of customers.

Keywords: Market place lending, financial regulation, credit risk, credit markets, liquidity risk, standardisation, digital economy, banking competition, credit availability, small business lending, consumer credit

JEL Classification: G21, G28, L21

Suggested Citation

Milne, Alistair K. L. and Parboteeah, Paul, The Business Models and Economics of Peer-to-Peer Lending (May 5, 2016). ECRI Research Report, 2016, No 17. Available at SSRN: https://ssrn.com/abstract=2763682 or http://dx.doi.org/10.2139/ssrn.2763682

Alistair K. L. Milne (Contact Author)

Loughborough University - School of Business and Economics ( email )

Epinal Way
Loughborough
Leicestershire, LE11 3TU
United Kingdom

Paul Parboteeah

Loughborough University - School of Business and Economics ( email )

Epinal Way
Loughborough, Leicestershire LE11 3TU
United Kingdom

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