Peer-to-Peer Lending & CrowdFunding - Unit 3.pptx
- 1. 02/23/2025 Dr. P. Pirakatheeswari, Asso. Prof., SRCAS, C oimbatore. PEER-TO-PEER LENDING & CROWDFUNDING Dr. P. PIRAKATHEESWARI Associate Professor of B Com – PA, Sri Ramakrishna College of Arts & Science (Autonomous), Coimbatore – 641006. 1
- 2. 02/23/2025 Dr. P. Pirakatheeswari, Asso. Prof., SRCAS, C oimbatore. 2 PEER – TO – PEER LENDING AND CROWDFUNDING Peer-to-Peer (P2P) Lending is a financial practice where individuals lend money directly to other individuals or businesses through online platforms, bypassing traditional financial intermediaries like banks. P2P lending platforms connect borrowers seeking loans with lenders (investors) who are willing to fund those loans. The platforms typically handle the administrative processes, including credit checks, loan agreements, and payment collection, while earning revenue through fees. This model often provides borrowers with lower interest rates and lenders with higher returns compared to traditional banking systems. However, it also comes with risks, such as loan defaults or lack of insurance for lenders.
- 3. 02/23/2025 Dr. P. Pirakatheeswari, Asso. Prof., SRCAS, C oimbatore. 3 CROWDFUNDING PLATFORMS 1. Equity-Based Crowdfunding Definition In equity-based crowdfunding, backers invest money in exchange for equity or ownership stakes in the business. They become shareholders and may benefit from dividends or capital gains if the company succeeds. Key Features Ownership Transfer: Backers receive shares proportional to their investment. Regulated: Subject to financial regulations to protect investors. Focus: Typically used by startups or growing businesses seeking significant funding.
- 4. 02/23/2025 Dr. P. Pirakatheeswari, Asso. Prof., SRCAS, C oimbatore. 4 2. Reward-Based Crowdfunding Definition In reward-based crowdfunding, backers contribute funds in exchange for non-monetary rewards, such as early access to products, branded merchandise, or unique experiences. Key Features •No Ownership Transfer: Backers do not receive equity or financial returns. •Pre-Selling Model: Often used to gauge interest and secure funding before production. •Focus: Commonly used by creative projects, tech innovations, and small-scale ventures.
- 5. 02/23/2025 Dr. P. Pirakatheeswari, Asso. Prof., SRCAS, C oimbatore. 5 CHALLENGES ASSOCIATED WITH PEER-TO-PEER (P2P) LENDING: 1.Credit Risk (Default Risk) 2.Regulatory Uncertainty 3.Lack of Liquidity 4.Platform Risk 5.Borrower Fraud 6.Limited Borrower Protections 7.Inconsistent Returns for Lenders 8.Market Volatility
- 6. 02/23/2025 Dr. P. Pirakatheeswari, Asso. Prof., SRCAS, C oimbatore. 6 PURPOSE OF CROWDFUNDING PLATFORMS The main purpose of Crowdfunding Platforms in the financial ecosystem is to act as intermediaries that connect individuals or organizations seeking funds (fundraisers) with individuals or groups willing to provide financial support (backers or investors). These platforms facilitate the fundraising process by offering a transparent and efficient online space where fundraisers can present their projects, ideas, or ventures, and backers can contribute based on their interests or expectations. Key roles include: 1.Democratizing Access to Funding 2.Enhancing Financial Inclusion 3.Encouraging Innovation 4.Risk Sharing
- 7. 02/23/2025 Dr. P. Pirakatheeswari, Asso. Prof., SRCAS, C oimbatore. 7 MARKETPLACE LENDING Marketplace lending, also known as peer-to-peer (P2P) lending, is a form of alternative lending where online platforms connect borrowers directly with lenders (investors) without the involvement of traditional financial institutions like banks. These platforms act as intermediaries, facilitating the loan process by offering technology-driven solutions for loan approval, risk assessment, and disbursement. Key Features of Marketplace Lending 1. Direct Connection: 2. Technology-Driven Processes: 3. Variety of Loan Options: 4. Transparent Operations: 5. Risk Diversification for Investors
- 8. 02/23/2025 Dr. P. Pirakatheeswari, Asso. Prof., SRCAS, C oimbatore. 8 ADVANTAGES For Borrowers •Lower Interest Rates: •Borrowers with good credit scores often receive competitive rates compared to traditional banks. •Reduced overhead costs of online platforms contribute to lower borrowing costs. •Faster Loan Approval: •Streamlined online processes enable borrowers to receive approvals and funds quickly, sometimes within hours. •Greater Accessibility: •Marketplace lending provides opportunities for individuals and small businesses that might not qualify for traditional bank loans due to a lack of credit history or collateral. •Flexible Loan Options: •Platforms offer a variety of loan products tailored to different borrower needs, such as personal loans, business loans, or debt consolidation.
- 9. 02/23/2025 Dr. P. Pirakatheeswari, Asso. Prof., SRCAS, C oimbatore. 9 DISADVANTAGES •Higher Risk of Penalties: •Borrowers may face steep penalties for late payments or defaults, as marketplace lenders have stricter repayment policies. •Variable Interest Rates for High-Risk Borrowers: •Individuals with poor credit may be charged higher interest rates, which can increase their financial burden. •Limited Regulation: •Compared to traditional banks, marketplace lending platforms may not offer the same level of borrower protections or oversight. •No Relationship Banking: •Lacks the personal touch of traditional banking, such as tailored advice or negotiation opportunities.
- 10. 02/23/2025 Dr. P. Pirakatheeswari, Asso. Prof., SRCAS, C oimbatore. 10 For Investors - Advantages •Higher Returns: •Investors can earn better returns compared to savings accounts or traditional fixed-income investments. •Diversification across different borrowers spreads risk while maintaining profitability. •Direct Investment Opportunities: •Investors have control over their portfolio, choosing borrowers based on risk tolerance and desired returns. •Low Entry Barriers: •Platforms often allow small minimum investments, enabling participation from individual and institutional investors alike. •Transparency: •Detailed borrower profiles and loan terms provide investors with information to make informed decisions.
- 11. 02/23/2025 Dr. P. Pirakatheeswari, Asso. Prof., SRCAS, C oimbatore. 11 Disadvantages •Risk of Default: •Loans are unsecured, and defaults by borrowers can lead to significant losses for investors. •There is often no guarantee of repayment or insurance for defaults. •Lack of Liquidity: •Investments are typically locked in for the loan term, making it difficult for investors to access their funds early. •Limited Regulation and Oversight: •Marketplace platforms are less regulated than traditional financial institutions, increasing risks for investors. •Platform Reliability Risks: •If the platform fails or ceases operations, investors may struggle to recover their investments or manage loans directly.
- 12. 02/23/2025 Dr. P. Pirakatheeswari, Asso. Prof., SRCAS, C oimbatore. 12 Digital Lending: Digital lending refers to the process of lending money via online platforms, where loans are typically applied for, processed, and disbursed digitally. This type of lending has grown rapidly in recent years due to technological advancements that allow financial institutions, fintech companies, and P2P platforms to lend money directly to consumers or businesses without the need for traditional banks. Key Features of Digital Lending: • Online Application • Speed and Convenience • Use of Alternative Data • Automated Underwriting • Accessibility
- 13. 02/23/2025 Dr. P. Pirakatheeswari, Asso. Prof., SRCAS, C oimbatore. 13 2. Credit Scoring in Digital Lending: Traditional Credit Scoring: In traditional lending models, the borrower’s creditworthiness is primarily determined through credit scores, such as FICO scores, which are based on factors like: •Payment History •Credit Utilization •Length of Credit History •Types of Credit Used •New Credit Inquiries Credit scores range from 300 (very poor) to 850 (excellent). Traditional lenders rely on these scores to evaluate the likelihood that a borrower will repay the loan. Limitations of Traditional Credit Scoring: •Limited Data •Bias and Inaccuracy •Slow Updates
- 14. 02/23/2025 Dr. P. Pirakatheeswari, Asso. Prof., SRCAS, C oimbatore. 14 3. Alternative Credit Scoring in Digital Lending: With the rise of digital lending, many platforms have adopted alternative credit scoring models. These models are designed to incorporate a wider range of data sources, and they use advanced algorithms and machine learning to assess a borrower’s creditworthiness. Alternative Data Used in Digital Credit Scoring • Transaction History • Social Media Behavior • Utility Bills • Educational and Employment History • Mobile Data Benefits of Alternative Credit Scoring • Inclusion of the Underserved • Faster Processing • More Accurate Risk Assessment
- 15. 02/23/2025 Dr. P. Pirakatheeswari, Asso. Prof., SRCAS, C oimbatore. 15 Challenges with Digital Lending and Credit Scoring: 1.Data Privacy and Security Concerns: •The use of alternative data and personal information raises privacy concerns. Digital lending platforms need to ensure robust data security to protect users' sensitive information. 2.Regulatory Compliance: •Digital lenders must comply with evolving regulations on data usage and consumer protection, which can vary by region. 3.Bias in Algorithms: •While machine learning models can improve credit scoring, there is the potential for bias if the data used to train these algorithms is not representative or fair, especially when it comes to race, gender, or income-related disparities. 4.Over-Reliance on Technology: •Over-reliance on automated systems for underwriting could lead to issues if the algorithms are not well-designed or tested for all potential borrower scenarios.
- 16. 02/23/2025 Dr. P. Pirakatheeswari, Asso. Prof., SRCAS, C oimbatore. 16