The economics of peer to peer lending

With the UK Financial Conduct Authority (FCA) commencing its post-implementation review of the crowdfunding market, including both peer-to-peer (P2P) lending and equity-based crowdfunding, the Peer-to-Peer Finance Association (P2PFA) asked Oxera to conduct an independent economic assessment of P2P lending.

This report presents the findings of this economic assessment. It explains how P2P lending works and presents evidence on the benefits delivered to users of P2P lending and to the wider economy. Following an assessment of the key issues that have been raised by the FCA and other parties, the report considers what regulatory framework would be appropriate for the sector. Its focus is on the eight members of the P2PFA.

At a basic level, P2P lending platforms provide a facility creating a marketplace where investors who wish to lend funds can find potential borrowers and provide credit through P2P Agreements. These marketplaces are made possible by online technologies, which provide investors with high-quality direct lending opportunities that would otherwise not be possible. Platforms may provide additional value-adding services to their users—the investors and the borrowers—so that the loan or investment characteristics best meet their needs.

From the borrower’s perspective, P2P lending offers a competing source of finance to the banks. From the investor’s perspective, it is a new investment opportunity, similar in nature to corporate bonds but with a focus on small and medium-sized company (SME), consumer and property loans. P2P lending provides a new, effective form of financial intermediation.