Cynicism, Resentment, and Misinformation: A look at the current criticisms of P2P lending.
As someone involved with a P2P lender and generally interested in new forms of investment through utilisation of new technologies, I’ve noticed the huge amounts of hype and excitement that have been following P2P lending. However, more recently, I’ve also noticed the blatant misinformation and cynicism that have been increasingly circulated through media and journalism.
Firstly, I’d like to state that I’m quite obviously not impartial. I’m quite strictly “for” P2P lending, I think that it’s a lucrative and quite simple technique to diversify. No, I am not against conventional investment at all. The purpose of this article is not to refute the purchase of shares, property or any other sort of conventional investment, it is to refute the people who are quick to shun and discourage P2P lending.
To begin with, I’d like to highlight the value of credibility. The banking sector as a whole has extremely high barriers to entry. Omitting the cost of branches, hiring of labor, and the cost of a proficient and skilled work-force; the cost of obtaining credibility is very expensive. It takes years of experience and existence to develop this credibility, and typically years of little success and profit. However, once credibility is developed, it is an extremely lucrative tool. Once the perception of credibility is developed, banks are able to increase their margins in almost every facet of revenue generation; without much or any significant objection from their customers and clientele.
Often, when I discuss P2P lending with someone who has not quite researched the topic, they are quick to tell me that it sounds like a scam. I agree, sometimes it sounds too good to be true. High rates of return, relatively low fees from the facilitator of the lending, and the ability to gain complete information about the borrower; this sounds like a scam, right? This leads back to my point of credibility. P2P lending is something that is relatively new, although P2P facilitators are growing in number and reputation, they must still make a trade-off to incentivize new customers to switch over. To borrowers, they offer loans that can be quickly funded with much less paper-work. On top of this, they typically offer more affordable interest rate repayments.
To lenders, they offer high interest rates, attempt to inform the lender as much as possible about the risks that the loan possesses, and ease of lending. On a platform like MarketLend, lenders are able to invest as little or as much as they want. They can diversify their own portfolio, by investing in high-risk ventures and lower-risk ventures.
The other term thrown around a lot is, “P2P Lending wouldn’t last a recession”. This term thrown around a lot by armchair economists and “financial gurus”. To begin with, the idea is unsubstantiated. Why would it not last a recession? Sure, riskier classed loans would probably not net a positive return on investment, but what aspect makes P2P lending so much more likely to fold in comparison to conventional banking? Mind you, there have been several banks that have folded in America in the trough of the GFC, it is not like banks are immune to recession. Secondly, empirically, using data from NSR on the LendingClub, a prominent P2P lender in the U.S between 2007-2009, the R.O.I. had significantly decreased, but relative to the stock market and property market, it had been relatively unscathed.
Finally, the resentment and cynicism held by many people stems from fear. Not a fear that P2P lending will crash down the door and kidnap their first-borns, but a fear that their financial knowledge may become increasingly irrelevant in the future. This isn’t true. There is nothing to be afraid about. P2P lending is a new and innovative way of utilising technology and generating benefits for both lenders and borrowers.
So, if you’ve yet to invest into P2P lending, give it a shot. It costs almost nothing to begin with, and is a great way to diversify your portfolio. As P2P lending grows in awareness and reputation, the cynicism and resentment will fade away. Maybe it won’t, but that just means a little less money in their pockets.