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Peer-To-Peer Lending - Determining The Future Of Banking Across The World

Lewis Humphries

With the peer-to-peer lending industry continuing to flourish, this article considers its future and the role of traditional banking.

Despite the fact that China is set to overtake the U.S. and become the largest economy in the world during the next four years, there are a number of measures by which America can still be judged as a leading force. Take its standing as a land of opportunity for small business owners and entrepreneurs, for example, which continues to be supported by a diverse financial culture and alternative lending options.

It is in San Francisco, in 2006, where the American peer-to-peer (P2P) lending industry was established and in the seven years since it has evolved considerably. As a result of this, market leaders Prosper and Lending Club have been responsible for the investment of more than $1 billion into the accounts of American citizens and their ventures, while it is also estimated that traditional banks in the U.S. are now responsible for just 25% of all lending.

The Rise of Peer-to-Peer-Lending
The concept of peer-to-peer lending has subsequently become synonymous with the modern American dream, as it enables business start-ups to gain funding without having to approach banks. Through this type of financial arrangement, there is no need for lenders and borrowers to meet as the necessary transactions can be completed online. It is also true to say that peer-to-peer lending has flourished in the vacuum created by the global recession, as banks have tightened their purse strings and the need for alternative financial solutions has grown.

The success of peer-to-peer lending is not just restricted to America, as the U.K. industry is also thriving. This is thanks primarily to the success of American based companies, while technological advancement has also had a significant and positive impact. In addition to this, the U.S. based nonprofit campaign ‘Move Your Money' has made a significant impression on the British market, with consumers and business owners heeding its message to divest from banks and instead embrace a more diverse range of funding options.

The respective governments of both the U.K. and America have been keen to encourage alternative lending policies, as a part of their wider efforts to empower start-ups and small businesses. As a result, the British coalition recently announced that four peer to peer lenders were to be given a combined total of 55 million British pounds in taxpayers' money, alongside a private donation of equivalent value. This 110 million British pound fund is part of the 1.5 billion British pound Business Finance Partnership, which has been created to diversify commercial funding.

Can the Peer-to-Peer-Lending Industry Continue Its Growth?
While consumers, small business owners and government officials all seem to agree on the benefits of peer-to-peer lending, there are some question marks as to whether the industry's current level of growth can be sustained. Growth in the peer-to-peer lending industry has continued almost unchecked throughout the duration of the global recession, apart from a brief period in 2008 when some firms were forced to restructure their business after the Securities and Exchange Commission (SEC) announced that all loans were to be registered as securities.

The challenge now facing lending firms is whether this level of growth can be maintained as the condition of the global economy begins to improve. Although banks are unlikely to relax their increasingly stringent lending practices in the light of an economic boom, they may be perceived in a more positive light by consumers and small business owners. Should confidence in banking and traditional lending institutions begin to rise, then the appeal of peer to peer arrangements may diminish accordingly.

A challenge facing peer to peer lenders in the U.K. is the drive to introduce more stringent regulations, which may have an impact on the popularity of the practice. While many of the market leaders claim that the implementation of uniform regulations will actually help their business, there is a danger that such a move could also make peer-to-peer lending less helpful to aspiring individuals with a poor credit history. It may also prove particularly challenging to draw up centralized regulations across the entire industry, as the subtle differences between peer-to-peer lending and concepts such as crowdsourcing ensure that debt, equity and even non-financial rewards may be offered in exchange for an investment.

The Bottom Line
While peer-to-peer lending is now a global phenomenon, it is U.S. firms and regulatory bodies that continue to set the trends within the industry. So as the practice becomes increasingly popular in Europe and the U.K., there are calls for respective governments to adopt similar guidelines to those implemented in America as a way of regulating lenders and their conduct.

In terms of its long-term growth, the industry is currently approaching a pivotal and potentially decisive juncture. While peer-to-peer lending appears to offer a bright and liberated future to business start-ups throughout the world, there remains a slight chance that increasing global stability and more rigid regulations may have a negative impact on its overall appeal. Even if this is the case, however, it is likely to have only a minimal effect on the industry and its ability to stand shoulder to shoulder with banks and traditional lending institutions.

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