Peer-to-peer crowdlending has become a staple of the fintech push. It is a good way for matching lenders with borrowers online. However, some experts claim it is too inefficient to become a viable alternative financial model.
The Concept of P2P Crowdlending
In recent years, the concept of crowdlending has undergone big changes. A major shift in focus highlights the potential of embracing a peer-to-peer model. Matching borrowers and lenders through online systems can be very powerful. It is also of great value to individuals and businesses seeking a loan.
On the surface, this model disrupts financial services. Traditional banks are not too amused by the business model, yet they aren’t overly concerned either. In terms of financial inclusion, crowdlending can be a game-changer. Banking the unbanked has been an ongoing struggle for many years now.
Rapid growth appears to occur in crucial financial regions. Particularly the United Kingdom notes a hefty increase in P2P crowdlending ventures. It is one of the biggest markets for this business model globally. That ongoing success comes at a cost, however.
It’s not all Glory and fun
The growth of a financial industry is always a mixed bag. Some companies will succeed, whereas others will crumble in quick succession. Crowdlending is not an exception in this regard. Some platforms have already shut down for a wide variety of reasons.
A secondary concern comes in the form of malpractice. Simply because a company claims to connect borrowers and lenders doesn’t mean they should be trusted. Combined with dysfunctionality, malpractice can have significant consequences. A fair few companies have gone belly up because of these two reasons alone.
Key Risks Remain
Other concerns regarding crowdlending have been highlighted by experts this month. The first fear is the potential for misallocation of capital in the economy. Borrowers are not always monitored, or vetted through a selection process. Until that aspect changes, there will be plenty of concerns. In the UK, the FCA already introduced additional requirements to combat this issue.
Another issue is how the crowdlending “boom” occurred during a time of economic recovery. Most of the global economies now note stagnation or even minor regression. That in itself will impact the appeal of crowdlending in a major way. Gauging the full risks is difficult, but it is safe to say there will be some repercussions down the line.
If a crowdlending platform goes bankrupt, the consequences for users remain somewhat unclear. A bankruptcy will disrupt the outstanding loans for both lenders and borrowers. However, most of these platforms seem to lack proper risk management systems. This is a critical aspect that needs to be resolved fairly soon.
Risk Versus Reward
Lenders expose themselves to a certain degree of risk. In return, they hope to pocket decent returns. That is not always the case, according to a recent study. There is a big discrepancy between promised returns and the risks borne by lenders. When high-risk loans provide very low returns, the concept of crowdlending becomes a lot less appealing.
Part of this problem is created by mispricing loans. It is an issue that mainly affects newcomers in the crowdlending industry. However, consumers should also be more careful when dealing with such aspects. Willingly accepting low returns without a valid cause is not something anyone should endorse.