Characteristics
Peer-to-peer lending does not fit cleanly into any of the three traditional types of financial institutions--deposit takers, investors, insurers--and is sometimes categorized as an alternative financial service.
The key characteristics of peer-to-peer lending are:
- it is conducted for profit
- no necessary common bond or prior relationship between lenders and borrowers
- intermediation by a peer-to-peer lending company
- transactions take place on-line
- lenders may choose which loans to invest in
- the loans are unsecured and not protected by government insurance
- loans are securities that can be sold to other lenders
Early peer-to-peer lending was also characterized by disintermediation and reliance on social networks but these features have started to disappear. While it is still true that the emergence of internet and e-commerce makes it possible to do away with traditional financial intermediaries and that people may be less likely to default to the members of their own social communities, the emergence of new intermediaries has proven to be time and cost saving, and extending crowdsourcing to unfamiliar lenders and borrowers open up new opportunities.
Most peer-to-peer intermediaries provide the following services:
- on-line investment platform to enable borrowers to attract lenders and investors to identify and purchase loans that meet their investment criteria
- development of credit models for loan approvals and pricing
- verifying borrower identity, bank account, employment and income
- performing borrower credit checks and filtering out the unqualified
- processing payments from borrowers and forwarding those payments to the lenders who invested in the loan
- servicing loans, providing customer service to borrowers and attempting to collect payments from borrowers who are delinquent or in default
- legal compliance and reporting
- finding new lenders and borrowers (marketing)
Read more about this topic: Person-to-person Lending