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The History of P2P Lending

Franklin Carneiro da Silva| Updated May 16th, 2022

Over the course of the past two decades, society has witnessed an enormous amount of changes in the way people conduct their daily lives. Technological advances have completely altered the way consumers communicate, work, travel, shop, eat and educate themselves. There have been major disruptions in various industries across the global landscape, including the banking and lending industry. In this article, you will learn how the p2p lending industry evolved into what it is today, as well as what the future holds.

1. The traditional banking model

The traditional banking model has been in existence since the Bank of England began issuing bank notes in 1695. This marked the beginning of traditional banking as we know it today. Traditional banking is a fairly archaic process whereby depositors place their funds in a local bank in exchange for receiving an interest payment from the bank. In return, the bank loans the depositors’ money to businesses and other borrowers. The bank earns a profit by charging an interest rate to the borrower.

This model is a never ending process of money coming into the bank (through deposits) and money leaving the bank (through loans). The bank simply acts as an intermediary between depositors and borrowers. Traditional banking is a very lucrative business. In fact, if the bank is managed properly, it’s almost impossible for the institution to lose money. This explains why there has been very little change in banking and lending during the past few hundred years. There’s absolutely no incentive for these financial institutions to make any adjustments. The banks operate under the old saying of, “If it works, don’t fix it.”.

traditional banking

Despite the banking industry’s best efforts to suppress competition in the area of lending, the old banking model is beginning to face major competition from several different angles. For the first time in the history of modern banking, new modifications and advancements are taking place in this space.

2. First Peer-to-Peer Lending Company (2004)

Many people believe that peer-to-peer lending was introduced during the 2008 global financial crisis. This is true to a certain extent because the popularity of P2P lending increased dramatically following the financial crisis.

However, the true beginning of P2P lending dates back to 2004, when a group of individual investors founded Zopa, a peer-to-peer lending company based in the United Kingdom. The original founders of Zopa included Giles An- drews, James Alexander, Richard Duvall, David Nicholson and Tim Parlett.

In 2004, these gentlemen were employed by Egg Banking, which was launched in 1998 as the first internet bank in the UK. Based on their experience with traditional bank lending, Andrews, Alexander, et al. could clearly see that traditional banks were unable to service the borrowing needs of all bank customers. There was an untapped market in consumer lending that was not being serviced by traditional banks. The team from Egg Banking decided to fill the void by launchng Zopa. Although Zopa was founded in 2004, the business was not officially launched until March 2005.

zopa logo

Zopa – First P2P Lending Company

Zopa is still in business today. In fact, the company is one of the most popular P2P lending sites in Europe. Based on data provided by P2P Market Data, Zopa has completed £5.27 billion in P2P loans since its inception in 2005. It is the second largest P2P lender in Great Britain, with a market share of 30.4%. On a global basis, Zopa is the fourth largest P2P lender based on total funding since inception.

Thanks to the success of Zopa, Europe quickly became a major financial hub for alternative forms of lending like peer-to-peer lending. Following the 2008 global financial crisis, P2P lending exploded in popularity throughout Europe. Today, Europe is the global leader in P2P lending while the United Kingdom is easily the country with the most P2P activity.

3. Birth of Peer-to-Peer Lending in the US

The United States was 11 months behind the United Kingdom in regard to introducing peer- to-peer lending. The first P2P lender was launched on 5 February 2006 in San Francisco, California USA. The name of the company was Prosper Marketplace. Prosper was immediately successful, probably due to the fact that it was initially funded by some of the country’s largest venture capital firms. The list of initial investors included BlackRock, Sequoia Capital and Benchmark Capital. The company is still in business today. As of 31 March 2020, Prosper Marketplace has successfully funded over $16 billion in P2P loans.

Shortly after Prosper Marketplace was successfully underway, another San Francisco-based P2P company was founded. The name of the company was LendingClub. It was founded in 2006 and officially launched in August 2007. The company is still operating today. In fact, LendingClub is the world’s largest peer-to-peer lender in terms of total loan volume. As of 31 March 2020, total funding was $56.7 billion, easily making it the most successful P2P lender within the alternative lending industry.

4. Peer-to-Peer Lending in China

China entered P2P lending in January 2013, when WeLab Limited was launched by Simon Loong and Kelly Wong. P2P lending exploded in popularity shortly after WeLab became operational. Investors quickly realized that China was the perfect location for alternative forms of lending based on the fact that most small businesses in China were not being properly serviced by China’s state-owned banking system. The vast majority of the jobs in China are created by small-medium sized enterprises (SMEs). There are over 40 million SMEs in China. The state-owned banks were simply unable to provide adequate service to the SMEs. This explains the exponential growth in P2P lending beginning in 2013.

By 2016, there were over 4,000 P2P lenders throughout China. However, the P2P industry in China quickly turned into an unregulated disaster. Several of the Chinese lending companies were committing fraud and other forms of financial abuse. Thousands of Chinese investors were defrauded out of their life savings by unknowingly participating in P2P Ponzi schemes. The P2P industry grew so rapidly that Chinese regulators were simply unable to properly regulate the P2P companies. In 2018, Chinese regulators introduced a nationwide campaign to clean up the fraud and other violations within the alternative lending industry, particularly peer-to-peer lending. Today, two years after China rolled out its campaign to remove fraudulent activity in the P2P industry, the country is still struggling to provide a safe lending environment for SMEs. There exists a great deal of uncertainty within the industry.

In 2019, the fraud and corruption had reached such extreme levels, that several Chinese provinces completely shut down the P2P platforms. As a result of the crackdown, many P2P services disappeared.

Today, two years after China rolled out its campaign to remove fraudulent activity in the P2P industry, the country is still struggling to provide a safe lending environment for SMEs. There exists a great deal of uncertainty within the industry.

Within the past 12 months, Chinese regulators have imposed strict guidelines on the entire peer-to-peer industry. The most important new regulatory guidance requires companies to meet a minimum registered capital level of 1 billion yuan (€128,85 million). Additionally, P2P lenders will not be able to operate in China unless they are granted an online microlending license. Many of the smaller lenders were unable to meet the new guidelines. This explains why the number of P2P lenders has declined so dramatically.

Although the amount of P2P lending has fallen rather sharply in China during the past few years, the industry is in much better shape from a financial perspective. Going forward, China is destined to become one of the biggest players in peer-to-peer lending. In fact, the entire global P2P industry is slowly becoming a major participant in consumer and business lending.

5. The state of Peer-to-Peer Lending today

In addition to Europe, United States and China, several other countries have experienced a rapid growth in peer-to-peer lending. These countries include Australia, New Zealand, India, Sweden, Israel, Canada, Brazil, Indonesia, Korea and Bulgaria.

Top 5 P2P Lending Volume By Country In 2019

  • China – 58,491 million USD
  • United States – 24,068 million USD
  • United Kingdom – 1,800 million USD
  • France – 229 million USD
  • Germany – 233 million USD

P2P Global Loan Volume

  • 2017 – 23.017 million
  • 2018 – 24.352 million
  • 2019 – 26.487 million
  • 2020 – 29.394 million (est)
  • 2021 – 32.266 million (est)
  • 2022 – 34.106 million (est)
  • 2023 – 34.928 million (est)

Top 10 P2P Lenders’ Funding Amounts

p2p market data table

Source: P2P Market Data (as of 31 March 2020)

Despite the global pandemic, P2P loan volume continues to grow. Five of the largest P2P lenders increased their loan volume during these challenging times. The Top 10 list is dominated by Europe, United States and the UK. As you can see from the table, Lending Club is by far the largest peer-to-peer lender in the world.

6. The future of Peer-to-Peer Lending

Over the course of the past decade, P2P lending has become a legitimate source of financing for thousands of consumers and small businesses. Based on data provided by LearnBonds.com, the alternative loans industry has been growing by 17% per year since its inception in 2006. Global lending is projected to hit USD 312.6 billion by the end of 2020, and USD 390.5 billion by the end of 2023. Although these numbers are very impressive, P2P lending is tiny compared to traditional bank loans. For example, the total amount of current bank loans in the United States is USD 3.36 trillion. In regard to Europe, current bank loans are EUR 10.56 trillion.

Based on this data, we can conclude that P2P lending has a tremendous amount of growth potential. Most financial experts agree that the alternative loans industry will continue to capture market share from the traditional banking industry. Several experts within the P2P industry are concerned that the industry could be growing too fast.