By gatuyu t.j

Why, the market based finance ticks, is the ability to connects firms and households directly through platform. This is opposite of intermediary based finance, where for a household to access funds, they must pass through a financial intermediary, such as banks or assets managers.

Peer-to-peer (P2) platforms have become the biggest disruption in recent years. This has largely been due to efficiency gains and reduction in costs these platforms have introduced.

Traditionally, lending and borrowing in financial markets occurs through the use of financial intermediaries.These institutions like banks, will use depositor’s funds, incur such costs and other administrative expenses, and lend these funds in their own personal capacity.

Depositors are compensated for providing liquidity by earning interest, typically less than what the bank charges the borrowers. The borrowers are charged fees commensurate with their risk profiles as the institutions try to recoup expenses to profit from these transactions.

Peer-to-peer lending on the other hand,as the name suggests,is just that, interaction between peers. Whether it be individuals or businesses looking to lend, there are no intermediaries involved in the process except the one that creates a marketplace for the activity to occur.

It is not a new concept. Women, especially in rural areas, have practiced it for years through merry go round. The only limitation has been overly reliance on trust and geographical inhibitions.

This market based finance has gained popularity because it is instrumental in promoting financial inclusion. Individuals who would typically face high interest rates, or would otherwise be rejected from a loan due to their poor credit history, have been provided with easy access to the credit market.

Lenders are also able to earn a higher return on investments than through traditional lending channels. These services are generally provided through online platforms where borrowers and lenders are matched.

However, not all online lending platforms are peer-to-peer lending channels. For instance, Tala and Branch are online Shylocks, not P2P lenders. They are just traditional lending institutions, difference being they take advantage of the efficiency gains and reduction in costs that come with the use of new technology. outside of legacy systems.

So, how exactly does peer-to-peer lending work? Well, borrowers take loans from individual investors who are willing to lend their own money at an agreed upon interest rate. Investors are able to assess the borrower’s risk profile in order to determine the desired rate of return.

Depending on the lender’s appetite for risk, a borrower might receive the full loan amount or only a portion, but this does not mean the borrower will not be fully funded.

These loans are generally structured like syndicated loans. This is a loan offered by a group of lenders referred to as the syndicate that work together to provide funds for a single borrower. It’s then entirely possible that a single loan would be funded by multiple peers.

Most peer-to-peer intermediaries provide a range of services for both borrowers and investors. This includes online investment platform that enables borrowers to attract lenders and investors to identify and purchase loans that meet their investment criteria.

They also generally provide verification services for borrower identity, bank account, employment, and income, allowing them to filter out unqualified borrowers. Payments processing and servicing of the loans are also tasks generally undertaken by the lending platforms.

When explained, the concept may look a tad aloof. In practice, it is easier than it sounds.