Peer-to-Peer Lending: Opportunities and Risks

Abstract

AbstractWeb-based financial intermediation on a peer-to-peer (P2P) basis will eventually prevail as an economically superior form of organisation compared to the traditional banking business model. P2P lending is the most popular type of crowdfunding, whereby an internet platform collects small amounts of funds from individuals in a crowd to finance collectively a larger loan to individuals or businesses. Unlike a commercial bank, the platform does not take risks through its own contractual positions. Whereas banks accumulate risks by taking positions on their balance sheet, platforms decentralise the risks by spreading them to their users. The emergence of financial platform businesses challenges legislators and regulators in several respects: the “easy way” of modifying existing finance and banking laws is inadequate; the internal organisation and knowledge of staff is not well suited to regulating crowdfunding; and capital mediation by crowdfunding platforms requires a different regulatory approach than banking. Finally, there is no doubt that P2P lending platforms will in the long run need a dedicated, single European regulatory framework.