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Peer to Peer Lending (P2P)

Peer to Peer Lending abbreviated as P2P is
 Practice of lending money to unrelated individuals, or “peers”;
 a form of crowd-funding used to raise loans for people who need to borrow, from people who
want to invest;
 without going through banks or other traditional financial institutions;
 lending takes place online on peer to peer lending companies websites;
 The main idea is savers getting higher interest by lending out their money instead of saving it,
and borrowers getting funds at comparatively low interest rates;
 P2P lending is also known as social lending or crowd lending;

In India, all P2P platforms will now be considered non-banking financial companies and regulated by
the RBI.

Main Features / Characteristics of P2P Lending are

 Conducted for Profit;
 Intermediation by a P2P Lending Companies like Upstart, Funding Circle, Prosper Marketplace,
CircleBack Lending, Peerform, SoFi, Lending Club etc.;
 Transactions takes place online;
 Lenders uses own discretion to lend;
 Unsecured and are not protected by Government Insurance; But in UK Zopa and RateSetter
offers protection funds.
 loans are securities that can be transferred to others, either for debt collection or profit, though
not all P2P platforms provide transfer facilities or free pricing choices and costs can be very high,
tens of percent of the amount sold, or nil;
 No pooling of funds;
 Multiple Lenders to one borrower and vice versa;

Services offered by P2P Intermediaries:

 online 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 borrowers
 processing payments from borrowers and forwarding those payments to the lenders who
invested in the loan

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 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)

Advantages of P2P
For borrowers:
 Easy Application: Application can be made online by with minimal personal information.
 Speed of Funding: Loans can be raised quicker than the banks or other financial institutions.
 Funding for all kinds of loans: P2P loans can be raised for any amount
 Interest rate: Borrowers can bid for the loan in P2P websites. It allows them to choose the
lender, who offers a reasonable rate of interest.

For lenders:
 Risk Diversification: P2P platforms let you spread your capital across multiple loans1. This
enables you to better manage your exposure to risk.
 High Earnings: P2P can potentially give you access to significantly higher returns than you could
get through a high-street savings account.
 Choice of Borrowers: Lenders have the full knowledge of the parties to which his/her funds
goes, unlike banks where the bank lend out the funds and the individual depositors have no
knowledge where there funds are invested by the bank.

Disadvantages of P2P
For borrowers:
 Exhausting choice: Since the peer-to-peer web portals are filled with too many lenders, the
borrowers may be confused to decide on. Looking for the genuine lender is essential.
 Wider space: Instead of the one-to-one contact with the loan officer or bank manager, you may
be in a position to open your business to a range of lenders and explain them about your needs.
Being discussed in the public may take away the anonymity.
 No guarantee: Even if the request is approved, there is a guarantee that the fund will be
transferred into your account, unless it actually takes place.

For lenders:
 Waiting period: Unlike banks or Stock Markets, you may have to wait with your money, until a
borrower arrives and this waiting time may not fetch any interest.
 No legal laws: While lenders can make higher returns from P2P loans, those returns also come
with a risk. The money that lenders issue on loans is usually uninsured, meaning that if the
borrower defaults, the lender lose whatever they put into the loan. Lenders can reduce their risk
by sticking to borrowers with better credit scores, but they can never be completely sure if a
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borrower is going to pay back what they owe. There’s also the risk of funding a loan just because
the borrower wrote a touching story in his request that clouded the lender’s judgement.

Popular P2P Lending Companies

 Upstart
 Funding Circle
 Prosper Marketplace
 CircleBack Lending
 Peerform
 SoFi
 Lending Club

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Lending Club
About
 first P2P lender to register its offerings as securities with SEC and to offer loan trading on a
secondary market
 Founded in 2007 by Renaud Laplanche
 Headquartered in San Francisco, California
 Scott Sanborn, CEO & President
 was initially launched on Facebook as one of Facebook's first applications
 After receiving $10.26 million in a Series A funding round in August 2007, from venture capital
investors Norwest Venture Partners and Canaan Partners, Lending Club was developed into a
full-scale peer-to-peer lending company
 the total loans issued till mid-2015 amounted to $11,167,217,348
 caters to loans for various purposes like personal finance(consolidate debt, pay off credit cards,
home improvement and pool loans), business loans, patient financing (dentistry, fertility, hair
and bariatric), as well as for investing
 The minimum personal loan amount offered is $1,000 ($15,000 for businesses), going to a
maximum of $35,000 ($300,000 for business).
 This popular brand became the first publicly traded online peer-to-peer lending company in the
U.S., with its successful initial public offering (IPO) on the NYSE in December 2014.
 The company currently has a market capitalization of 5.14 billion

Business Model
Customer Segments:
Lending Club has a multi-sided business model, with two interdependent customer segments that are
both needed in order to operate:

 Borrowers
 Investors

Value Proposition:
# For Borrowers
1 Cost Reduction
The company’s platform enables it to maintain
lower operation costs than those for typical
bank loan and credit card programs, transferring
those savings onto customers through lower
rates. In fact, a survey of borrowers who used its
personal loans found that their interest rates
For Investors
Convenience
The company offers investors tools that they
can use to select loans customized to their
objectives, making it easier to build
personalized portfolios. Investors are also
given the option of automated investing, a
free offering that invests funds in loans that

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were 35% lower on average than the rates they
were charged for their outstanding credit cards.
Lending Club also avoids hidden fees and allows
users to prepay their balances without a penalty.
2 Convenience
Customers seeking a loan only have to complete
a single application. The company’s system uses
its technology and online data to rapidly
determine risk, identify a credit rating, and
settle on appropriate interest rates. Qualified
candidates are able to receive offers in as little
as a few minutes and can assess their options
with no effect on their credit score.
meet specified criteria when they become
available.
Performance
The company provides risk-adjusted returns
on loans. Stringent criteria are used to limit
the borrower pool to only the most qualified –
the typical recipient has a 699 FICO score, 16.3
years of credit history, an 18.12% debt-to-
income ratio, and a personal income of
$75,055. Further, Lending Club Notes show
traditional returns by Grade A-C of 5.26% to
8.69%.

 Lending Club offers a brand/status value proposition for both of its customer groups.
 It is well-established, having been in existence for a decade. It bills itself as the world’s
largest online loan marketplace, with hundreds of thousands of borrowers and $16 billion in
loan originations.
 Lastly, it has an A+ rating with the Better Business Bureau and a Net Promoter Score in the
70s, putting it at the higher end of customer satisfaction levels for financial services firms.

Channels
 Lending Club’s main channel is its website, through which it promotes its service.
 The company also engages in direct marketing via snail mail.
 In 2015, it began a strategic partnership with a collective of community banks in which it
offers co-branded personal loans to the institutions’ customers.

Customer Relationships
 Lending Club’s customer relationship is primarily of a self-service, automated nature.
 Customers utilize the service through its website while having limited interaction with
employees.
 Investors can even sign up for automated investing so the process can occur without them
logging in.

Key Activities
 Lending Club’s business model entails maintaining a vibrant platform between two parties:
borrowers and investors.

Key Partners
 Lending Club’s key partnership in its operations is with issuing banks, who originate the
loans that it offers.

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 Its main issuing bank is WebBank, an industrial institution that oversees a variety of
commercial and consumer financing programs.
 Lending Club also works with Comenity Capital Bank and NBT Bank for its patient finance
and education loans.
 Lastly, it has a deal with Cross River Bank in which the entity operates as a back-up in the
event that WebBank is no longer able to perform its role.

Key Resources
 Lending Club’s main resource is its proprietary software platform, which automates key
activities such as application processing and loan funding. Its sophisticated analytical tools
make these procedures possible.
 It also relies on technology and service staff to provide maintenance and customer support.

Cost Structure
 Lending Club has a cost-driven structure, aiming to minimize expenses through significant
automation and low-price value propositions.
 Its biggest cost driver is sales/marketing expenses, a fixed cost that largely consists of
investor and borrower acquisition efforts.
 Other major drivers are in the areas of administration, engineering/product development,
and origination/servicing.

Revenue Streams
Lending Club has three revenue streams:

1. Transaction Fees: charged to borrowers for the processing of their applications

2. Servicing Fees: charged to investors for the matching of available loan assets with capital; it
is equal to 1% of the total of borrower payments obtained within 15 days of the due date
3. Management Fees: charged to investment funds and other managed accounts

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