Peer-to-peer, marketplace or online consumer lending, has come a long way since its birth a decade ago. The two largest lenders, for example, loaned a combined $2.4 billion to consumers last year, triple what they did the year before. One forecast even expects the market to reach $1 trillion by 2025.
Understandably, conventional banks and financial institutions have taken notice. Some have already launched their own marketplace platforms for a piece of the action, further legitimizing the opportunity.
To cash in, however, retail and institutional lenders will need to broaden their selection beyond fast credit, student loans, home improvement and small business advances. They'll need to better understand the choices and preferences of borrowers — including the types of loans and the factors driving defaults — with the help of data science and analytics.
To that end, we recently survey 11,000 U.S. consumers on marketplace lending. We explored their perceptions on peer-to-peer lending, the profiles and predictors of default and the desired improvements to platforms and processes that extend across the marketplace.
Here are 11 things we learned
1. More than 6% of Americans have engaged in peer-to-peer lending, a quarter of which have acted as both lenders and borrowers. Depending on the borrower rating, defaults occur at a rate of 1.5%–16.5%.
2. Unexpected expenses, earnings disruption by job or business loss and lack of collateral security and personal guarantees were cited as the greatest reasons for default. Borrowers cited maintaining a good reputation with the lending community, values and honor and preserving creditworthiness as reasons for not defaulting.
3. Borrowers use marketplace lending primarily to pay bills, remodel homes and repay debt. Among those we surveyed, 81% of loan applications were accepted by marketplace lending sites versus 44% by traditional banks. In addition to online calculators to compare rates, borrowers demand a one-step approval process and are inclined to borrow against collateral to buy a vehicle or a house over the long-term. They also want real-time money transfers; 92% of respondents indicated they are willing to borrow from lenders to shop.
4. Borrowers expressed a desire to interact with lenders at physical branches to facilitate face-to-face meetings, at a retail bank, for example. They're also willing to borrow in groups and be jointly responsible for loans to reduce default rates; 82% of those surveyed would subject their social media profiles to scrutiny to secure a loan.
5. Lenders believe marketplace lending allows them to access better returns, have greater control over their investments (such as using their own financial models when assessing risk and choosing a borrower) and like the ease and efficiency of online transactions. Lenders are interested in funding loans for vehicles, education, small business and home improvements.
6. Lenders are comfortable lending to someone they know, since they believe the chances of default will be small. In the absence of knowing the borrower, lenders prefer highly-rated borrowers to avoid default. They are also willing to lend to a group of individuals who join together to request a loan, believing that peer pressure on the syndicate members will result in repayment.
7. Provisions for bad debts, a legal framework to deal with defaulters, minimum guaranteed returns and partnerships with retail banks were all high on lenders' wish lists.
8. Apart from default, lenders also fear platform bankruptcy, since online lending does not have the same government backing as traditional banks. Speaking of banks, 74% of respondents were willing to trust marketplace bank lending, given individual lenders' long-standing relationship with these institutions.
9. Most marketplace loans do not yet involve collateral, but personal guarantees and secured loans backed by assets are growing.
10. An overwhelming 97% of respondents consider security features and data privacy important for marketplace lending sites. 77% of borrowers and lenders are willing to pay a nominal fee for additional biometric security features.
11.Opportunities exist to offer loans for education and medical expenses. Both lenders and borrowers have shown an interest in these loan categories, in addition to established payday loans, purchase finance, education finance, real estate, merchant cash advance and loans to small businesses.
Eight recommendations for Peer Lending Improvements
Focus on vehicle and small business loans.
For vehicle loans, the vehicles should be used as collateral. This provides a greater degree of comfort to lenders. Similarly for small business loans, business assets can be used as collateral. Since banks are no longer meeting small business demand, this is a growing opportunity for marketplace platforms and lenders.
Consider real estate and student loans.
Our survey also found that individuals are willing to approach marketplace lenders to buy homes or refinance. With few available options, students expressed interest for marketplace loans.
Provide lenders with more analysis tools.
Deciding who to lend to is the most important. In addition to proprietary scores for classifying borrowers, marketplace platforms should provide more data about borrowers, as well as tools for performing in-depth analysis of available data. Lenders should also be allowed to conduct a portfolio analysis of their investments within marketplace platforms.
Consider financial and social factors before categorizing loans.
Social media indicators, such as recommendations by peers and past lenders, are significant predictors of creditworthiness. These must be considered before deciding on loan quality. Any borrower with a strong social network but a high likelihood of default should be encouraged to borrow in a group.
Provide quick approval of loans
Our survey confirmed that this is one of the most important features desired by borrowers. Application questions should be short and well written. Moreover, marketplace platforms should follow a one-time approval process.
Provide biometric security.
Simply put, this would increase adoption level. What's more, marketplace consumers are even willing to pay for such a feature.
Facilitate money transfers.
There is a significant demand for both domestic and international money transfers, according to our research. If this can happen in real time, borrowers will receive immense benefits. Lenders, too, are willing to participate in money transfers based on credit history and personal guarantees.
Leverage banking networks for a sustainable future.
Both lenders and borrowers have shown their inclination to lend/borrow more with a marketplace lending organization backed by a bank, since they are considered more trustworthy due to investment security and government support. Lenders and borrowers also want more face-to-face interaction with one another. This can be readily provided at existing bank branches. Furthermore, the high failure rate of the marketplace platforms can be significantly reduced as banks get involved.
For more information, read our full white paper on marketplace lending or visit our banking and financial services practice.