4 Peer to peer lending business models explained

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Reza Machdi-Ghazvini,CAIA
Last updated on 03 September 2021

P2P Lending - 4 business models

P2P lending is becoming increasingly popular among investors. Interest rates on traditional savings products such as overnight deposits and savings accounts are virtually non-existent, and P2P loans have so far proven their reliance during the Corona crisis. This has slowly convinced even the last big critics of the asset class.

If you have been a little more involved with P2P lending, you have probably already come across the terms P2P, P2B, platform and marketplace several times. This is because each P2P platform has its own business model. 

In this article, we show you which 4 P2P lending business models you should know and how they differ from each other.

P2P platforms

P2P platforms

The P2P platform (peer-to-peer platform) is the classic business model in P2P lending. In this business model, a platform takes over the tasks of a bank. This means that the P2P platform mediates and grants the loans.

An important difference to a bank is that a P2P platform does not accept deposits (savings accounts and overnight deposits). After a new loan is offered, the platform collects new funds until the loan is funded.

When you invest in a P2P loan through a platform, you lend money to a private person. The platform takes care of forwarding the payment flows between you as the lender and the borrower.

NEO Finance and Bondora are classical P2P platforms where you can invest in P2P loans.

Advantages of P2P platforms

  • Lending is very transparent, and you know exactly who you are lending your money to.

  • P2P platforms have full control over the lending process.

  • As an investor, you are only exposed to the platform risk and do not have to worry about individual loan originators (lending companies) defaulting.

Disadvantages of P2P platforms

  • With smaller P2P platforms, there is often only a low supply of loans.

  • Typically, all P2P loans are offered unsecured.

P2P marketplaces

P2P market place

P2P (peer-to-peer) marketplaces work pretty much like P2P platforms, with the difference that a P2P marketplace does not originate loans. A P2P marketplace only offers the loans, which are pre-funded, making the loan offering process much faster.

Many P2P marketplaces call themselves P2P platforms. Strictly speaking, this is also correct because they pursue the business model of a P2P marketplace, but are a pure (digital) platform as well. As the term P2P loans has become established, so has the term P2P platform in general.

On a P2P marketplace, various loan providers (loan companies) offer their loans to investors. It is important to note that loan initiators are not banks, but financial companies. The loan originators grant loans in their respective local credit markets and then offer these loans to investors on the P2P marketplace.

The largest European P2P marketplaces at the moment (February 2021) are Mintos, Twino, PeerBerry and viainvest.

Advantages of P2P marketplaces

  • Pretty much all P2P marketplaces offer loans with buyback guarantees (repurchase obligations). The advantage of buyback guarantees is that loan originators take care of the collection of delayed loans after a certain period of time.

  • You can invest in a vast range of loans, which differ, for example, by country, interest rate and term.

  • It is very rare to encounter a situation where there are not enough loans to invest in.

Disadvantages of P2P marketplaces

  • In addition to platform risk (the risk that the P2P marketplace will go bust), you need to consider counterparty risk. If, for example, a loan provider goes bankrupt, this will most likely result in a total loss of your capital invested in the loans from that loan provider.

  • P2P marketplaces are dependent on loan originators, which can lead to conflicts of interest, especially on marketplaces with a low number of loan originators.

  • As with P2P platforms, loans are usually unsecured.

P2B platforms

P2B platforms

P2B (peer-to-business) platforms basically function in the same way as P2P platforms. Often, the terms P2P and P2B are also used interchangeably, meaning actual P2B platforms refer to themselves as P2P platforms, which, strictly speaking, is not wrong. P2P stands for peer-to-peer (user to user), P2B is a bit more accurate in this context because users lend money to companies (businesses).

Mediated consumer loans and short-term loans on P2P platforms are always unsecured. The situation is different for P2B platforms because loans to companies are always granted with collateral, either real collateral (such as cars or real estate) or personal guarantees.

A very well known and established P2B platform is EstateGuru. On EstateGuru, you can invest in secured real estate loans.

Advantages of P2B platforms

  • The loans are granted and brokered with collateral, which is an additional security for you as an investor.

  • Corporate loans are generally considered riskier, which is why you can expect higher returns.

Disadvantages of P2B platforms

  • Mostly, the minimum investment per loan is higher than on P2P platforms. For comparison: On EstateGuru the minimum investment per loan is €50, while on Mintos you only have to invest €10 per loan.

  • Since the expected returns on P2B platforms are higher on average, they are very popular with scammers for Ponzi schemes.

  • Sometimes credit supply is quite low on P2B platforms. For example, on EstateGuru is not uncommon that sometimes hardly any loans are available to invest.

P2B Marketplaces

P2B market places

P2B (peer-to-business) marketplaces work pretty much the same way as P2B platforms, with the main difference being that a P2B marketplace does not grant loans directly, but only offers loans from loan originators to investors via the platform.

P2B marketplaces have not yet become as prevalent as the other P2P lending business models. We are only aware of Debitum Network as a P2B marketplace so far.

Advantages of P2B marketplaces

  • As with P2B platforms, loans on P2B marketplaces are collateralized.

  • Loans on P2B marketplaces are brokered with repurchase guarantees (repurchase obligations).

  • Greater choice of loans available to investors, and it is rare that there are no loans available to invest at all.

Disadvantages of P2B marketplaces

  • Similar to P2B platforms, P2B marketplaces could attract scammers to set up pyramid schemes.

  • P2B marketplaces are not yet established and there are very few P2B marketplaces so far.

Which P2P Lending business model is best for investors?

When investing in P2P Lending, it is crucial that the platform or marketplace is reputable and that it is not a sureties scheme.

In addition, it is important for you as an investor to be able to spread your capital across different loans with different terms and ratings (assessment of creditworthiness).

Regardless of which P2P Lending business model is pursued, these minimum criteria must be met so that you can achieve sustainable returns with your investments in P2P Loans.

Should I only invest in P2P or P2B platforms because of the counterparty risk?

This thought would not be wrong because you could simply exclude such a risk completely. However, you would then completely exclude more than half of the top 10 P2P platforms & marketplaces in Europe (measured by mitigated loan volume).

For example, you would exclude the platforms MintosTwino, PeerBerry and viainvest. However, this would also not be expedient, as you need to spread your capital over several reputable and secure P2P providers to manage the known risks of the asset class P2P loans.

In this context, however, there are two alternative ways in which you could manage the risk of a loan provider going bankrupt.

Diversification across at least 8 to 10 loan originators

Risk management is about determining risks and then making active decisions to avoid or eliminate the risks.

For example, if you don't want to generally exclude P2P providers that act as a marketplace, you could reduce the risk coming from insolvencies of loan originators by investing in P2P loans across at least 8 to 10 loan originators. If a loan originator then actually defaults, you can still recover the loss quickly, as you only lose a small fraction of your investments.

Loan originators owned by P2P Lending marketplaces

Another option would be to focus on marketplaces where the loan originators are owned by the lending marketplaces or belong to the same group.

For example, on the P2P marketplaces Twino and viainvest the loan providers belong to the same group.

This means that although the marketplaces still do not provide loans directly, the loan origination is still completely controlled by the parent company.

Some proponents of this corporate structure (holding structure) argue that because of this ownership structure, the two platforms Twino and viainvest platforms have come through the Corona crisis particularly well. In this context, the platforms are often compared with Mintos.

Nevertheless, in our opinion, it is undeniable that such a corporate structure lowers the risk of sudden bankruptcies of loan originators, which is beneficial for you as an investor.

While this comparison is not fundamentally wrong, it is a bit misleading. Mintos has mitigated a total of around €6 billion in loans (February 2021). Twino and viainvest have combined mitigated loans worth over €1 billion. Statistically, more loans consequently lead to more difficulties on the marketplace and therefore it is quite difficult to compare the P2P marketplaces with each other.