The P2P Lending Market Flourishes – But Will it Last?
The sharing economy flourishes. The P2P lending market, where individuals finance another individual’s loan, has become an alternative to traditional banking and its expensive and hidden fees. This is especially true in Eastern Europe.
But will the booming P2P lending market last?
In United States, where P2P loans have existed for more than 10 years, banks and institutional investors have also entered the. USA is, however, a mature market. The largest players, like Lending Club and Prosper, have seen profits decline and growth slow down or come to a halt.
In Europe, peer-to-peer lending is a newer phenomenon. Many new platforms started in 2015 and 2016. Some of them established in the Baltic countries. There are several reasons for this, but taxation is no doubt one of them. Estonia, as one example, has no corporate income tax on retained and reinvested profits. Distributed profits are taxed by 14-20%. Oversight may also be more relaxed than in other countries.
P2P market in continental Europe grew by 101% in 2016. Companies like Crowdestate (Estonia) and Mintos (Latvia) make a profit, but many others are still struggling to make their P2P platforms profitable.
The interest rates on bank savings will remain low and are no longer an efficient investment alternative. With interest rates hovering around 10% for an investment in P2P loans, it is easy to see why it daily attracts new investors.
What Happens to the Economy?
The continued development of the P2P lending market largely depends on how the economy will develop. Economists are often lousy forecasters, but many see a declining or slowing economy in their crystal ball.
A decline in economy in coming years will perhaps not change the booming P2P lending market. A decline will perhaps attract many new borrowers who cannot get a traditional loan. Loans that are paperless, wireless, and fast is a trend that may grow even faster in a weak or slowing economy.
But a bear market also means increased risks for investors, platforms, and lenders. A growing number of borrowers will struggle to pay back their loans. As an investor, you can expect to see more delayed or defaulted loans.
P2P platforms often like to paint a bright picture of the future, looking only at the enormous expansion during the last couple of years.
We share the bright outlook but think that a grain or two of scepticism is in order.