Creating greater opportunities and easy access to funds for start-ups, innovative companies and other unlisted SMEs is at the heart of policy strategies of the most economies. If these small start-ups are considered, on average about 60 percent of them survive the early 3 years of their activity. At the same time, these same start-ups contribute inexplicably for creation of jobs. Young and newly established firms account for an average of only 17 percent of employment, while creating 42 percent of new jobs. Consequently, the achievements of these firms are central for the future creation of jobs and economic growth in any economy around globe.
Newly established firms need resources and funds for succeeding, while financing is the most important aspect. During the last decade, peer-to-peer lending have developed into a novel way for entrepreneurial start-ups for securing much needed funds.
A number of years have passed since the creation of crowdfunding and peer-to-peer lending opportunities. In this regard, peer-to-peer lending platforms has been growing in most of the developed economies. In only European Union they successfully raised around 669 million Euros during 2015. On its turn, 2.7 billion British pounds were raised in the UK via the models of peer-to-peer lending that entail a financial return.
Peer-to-peer lending became innovative in terms of its ability of removing the intermediate from the process. At the same time, the world of modern alternative investments is becoming increasingly complex to navigate. Overwhelming amount of peer-to-peer lending platforms has been developed during the last decade that made it difficult for any developed economy to stay aside from these new financial products. In this regard, access to funds are not accompanied by venture capital or other traditional sources of venture investment. The personal and business loan markets have been transformed with peer-to-peer lending products so popular the Government has created a special innovative finance ISA to help consumers invest in them. Technology has powered the sharing economy, with people now able to connect and rent out everything from their driveways to their cooking. It has enabled consumers to bypass the mainstream banks in their quest for funds. Therefore, peer-to-peer lenders are expected to secure strong foothold in financial sector in the very near future.
However, this industry has a number of potential risks that pose threat for investors and platforms itself. In this regard, industry already provides high levels of disclosure that provides transparency and allows controlling for risks incurred by investors. Specifically, most of the peer-to-peer platforms allow for diversification across the large number of borrowers that considerably diversify the risks for investors. What remains unprotected is the loss and default over the business cycle.
“So far, peer-to-peer lending has not gone through serious economic meltdown” – says Asror Nigmonov, PhD student at University of Southern Queensland, Australia. “If that happens, in the scale of closer to Lehman collapse, losses are expected to jump substantially”. Over a major economic downturn peer-to-peer lending may run into serious hurdles and could easily exhaust investor funds. Therefore, one of the most important impediments in this industry is quantifying the risks of loss in a business downturn and educating investors about these risks.
This need has already been realized by a number of players in the market, while few of them already offering their solutions. “We gather information on peer-to-peer lending platforms operating in the global market” – describes his product Tomas Medeckis, CEO of Welltrado Alternative Investment Marketplace. “By aggregating, visualizing and ranking statistical data Welltrado helps investors to make high return investments, but with manageable and diversified risk across the globe”.
So far, the industry has been sailing in safe waters with low interest rates and generally stable economies worldwide. However, the future of the industry largely depends on complex and interrelated factors, while most of these factors are at macro scale. The recent report of Deloitte admitted that the interest rate environment alone may lead into the expected divergence in penetration of peer-to-peer lending into the UK market from £0.5 billion (under normalized interest rate environment) to £35.5 billion (under current interest rate environment) by 2025.
Though peer-to-peer lending has been developing on its own without any effect coming from the economy, quantifying risks and analyzing risk factors related with business cycles remain vital for future development of the industry. Subsequent outcomes of the aggregating platforms like Welltrado would, definitely, be the models of cross-country diversification, just like in traditional finance. These models, on its turn, would pave the way for future best practices and sufficient growth.
. Calvino, F., C. Criscuolo and C. Menon 2015. “Cross-country evidence on start-up dynamics”, OECD Science, Technology and Industry Working Papers, 2015/06, OECD Publishing.
 Tomlinson N., Foottit I. and Doyle M. 2016. Marketplace Lending: A temporary Phenomenon? Deloitte LLP