But any small business owner that has ever filled out a small business loan application at a Canadian bank and was denied will tell you that things don’t always go as planned.
When a loan application is denied by a bank, the next logical step for many consumers and small business owners is to seek out other financing options. This non-traditional financial services market that provides what is often referred to as “non-bank loans” is known as alternative lending-and peer-to-peer lending is one of the most popular forms of alternative lending today.
A Brief History of Peer-to-Peer Lending
The very first modern peer-to-peer lending platform in the world was created by Zopa, a pioneering fintech that initially launched in the United Kingdom back in 2005. It was quickly followed by several peer-to-peer fintech startups that emerged in the United States only months later, particularly in California and New York. Those first US-based peer-to-peer lending fintechs included Prosper, which was founded in 2005, and LendingClub, which emerged shortly after, in 2006, initially launching as a social lending solution and one of Facebook’s first applications.
Backed by venture capital funding, early peer-to-peer lending fintechs launched exclusively online believing that they could leverage technology and an intuitive online origination process in order to match investors with borrowers and fill in what they saw as a gap in the alternative lending market-a market that, at the time, was considerably littered with high-interest payday loans and had a deeply rooted reputation for being, well, shady.
The emergence of the new online-only, peer-to-peer lending model was unquestionably influenced by the mass adoption and growth of popular social networks at the time, as Facebook and Twitter user growth began to skyrocket and users began to establish trust with the platforms, finding a new level of comfort with technology and sharing private information online. The peer-to-peer lending model-sometimes referred to as “social lending” or “crowd lending”-allowed these early fintech startups to keep overhead costs low while attempting to get established.
The first major challenges came from the peer-to-peer aspect itself, as startups initially struggled to find not only lenders willing to invest but also credit-worthy borrowers in the early days of operation. According to Bednorz writing for P2P Market Data, the turning point for these early players ironically came as a result of the financial crisis of 2008:
“Public confidence in financial institutions collapsed. Quite suddenly, large numbers of individuals and businesses found themselves unable to secure a loan, small and medium enterprises (SMEs) facing particular difficulties. At the same [time], investors were turning away from conventional banking products and increasingly looking for alternative solutions that could yield higher returns” (Bedorz).
So did the credit supply as many banks run (sic) into serious survival issues
The success of early platforms like Zopa and Prosper spawned hundreds of subsequent fintech startups over the next decade, and effectively helped redefine the alternative lending landscape. These early pioneers in online alternative lending have since expanded their financial service offerings, making critical tweaks to their lending models which has resulted in the emergence of a similar peer-to-peer lending model known as marketplace lending-a model of peer-to-peer lending that allows institutions to invest on the platform, as well. In the process, these peer-to-peer fintechs have helped create a global peer-to-peer lending market worth over USD $68 billion, a number which is expected to grow 30 percent by 2027.
In 2020, the success of peer-to-peer lending even led to the first fintech acquisition of a US bank in the United States with the LendingClub’s purchase of Radius Bank.