Peer-to-Peer Lending

Posted: March 26th, 2020

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Peer-to-Peer Lending

Executive Level Analysis

The considerable extent to which information technology is transforming is based on the varied implications that it has imposed on an individual, social, organizational, and global level. Interestingly, advances of technology have changed the approaches used conventionally in providing services to different customers. In this particular case, the dynamic nature of technology is illustrated by the development of online platforms aimed at modifying business transactions among individuals within an interconnected setting. Simply, the Internet’s facilities have facilitated wealth creation. Accordingly, sales related to the e-commerce platform in the United States are expected to increase to $370 billion in 2017. Due to current trends that involve a substantial inclination towards the utilization of smartphones and tablets, owners have begun investing in online sales segments. Such practices ultimately render conventional communication channels as useless.

One platform currently in heavy use comprises peer-to-peer (P2P) lending. The respective platform has focused on gratifying the demands of clients in return for profitability on their finances. Accordingly, P2P lending websites are presently concentrating on substituting the difficulties and high overhead costs that recur in conventional banking via smarter and faster approaches of banking. On a positive note, P2P lending provides borrowers and lenders with an intermediate platform for transactions. These intermediaries create revenues through service charges, amortization fees, closing charge, and delayed reimbursements. In addition, close communication among clients is increasingly possible. On the other hand, the lack of securitization in respect to loans exposes the lender to the borrower’s possibility of default. Hence, borrowers with considerable risk pay substantial rates in comparison to those with low risks. Despite this, the benefits of P2P lending outweigh the costs.

Summary

Alterations in the financial sector coincide with the advancements that are in place especially in relation to information technology. Due to aspects such as dynamic consumer attitudes and behaviors, financial predicaments, and consistent IT-related advancements, non-banking platforms have emerged in an effort to provide excellent services to clients by exploiting opportunities provided by the Internet as well as the need to resolve overheads experienced in he provision of financing services. As such, the Social Web has changed the approaches that users procure for services. Unlike the past, individuals can be influenced easily towards the use of such services. Furthermore, the fairness created by information technology in the respective environment has facilitated the development of contemporary peer-to-peer financing representations that do not adhere to the strict and expensive aspects of traditional banking.

The respective platform has allowed borrowers to access funds easily from lenders at reduced interest rates. In spite of the positive sentiments associated with P2P lending, the information encompassing it is little. Based on this, the firm, Lending Club, has been assessed due to the success of its P2P lending platform. In addition, the use of other platforms such as Prosper.Com and Zopa in the analysis depicts the extent to which considerable similarity is evident in these online financing platforms. Further understanding of the P2P lending platform is made possible via the application of Agent-Based Simulation. Simulating the business model behind this platform highlights the effects of the provided interest rates on customers. Replicating the operation of the P2P lending platform via simulation of its business archetype develops further understanding of the specific value that the respective service offers to its customers.

What Do You Agree With?

Aside from the positive impact of e-commerce platforms, P2P lending has undeniably created a significant shift in the provision of banking services, particularly funding. Indeed, the author illustrates the benefits of P2P lending by focusing on its attributes as well as those of the conventional banking sector. Even though little is known about this particular platform, the success of Lending Club shows the gains that clients as well as organizations stand to accrue via the implementation and use of P2P lending. In this respect, I agree with the idea that describes P2P lending as an innovation in the provision of financing services. Over the years, financial institutions such as banks have enjoyed major control over funding operations via the imposition of high interest rates as well as prerequisites that mainly concentrate on the risk of the borrower in terms of defaulting payment.

Even though the same aspects are used in P2P lending, borrowers have access to other options based on their need or preference. The P2P lending platform allows lenders and borrowers to interact closely for the sole aim of transactions. In this respect, borrowers can access the amount of finances they require from the lenders with ease. The absence of traditional procedures such as the processes applied in banks further expunges the complexity and costs experienced in seeking out finances. Moreover, borrowers with higher default risks can still access funding despite the imposition of higher interest rates on their credit. Despite this, such rates are still manageable and feasible in contrary to those established by banking institutions. Therefore, P2P lending provides better financing services to interested customers via the elimination of overhead expenses and difficulties in accessing funds.

What Do You Not Agree With?

Even though the illustration of Lending Club’s P2P lending platform offers considerable insight, the article does not imply the risky nature involved in using these intermediaries. Specifically, the author declares that information concerning the income of the borrower, the credit grade, and other aspects such as the debt-to-income ration are accessible to an interested lender for the sole aim of initiating informed financing decisions. Personally, I do not agree with this idea. Accordingly, the mentioned factors do not necessarily assist the lender in making accurate financing decisions because of the uncertainty associated with them. Simply, such information may be accessible to the lender. However, the lender needs to identify other factors since the respective dimensions may prevaricate the true financial condition and status of the borrower in need.

In a number of cases, lenders are exposed to high default risks on the part of the borrower. In fact, lenders can lose their investments easily due to reliance on the stated factors consistently. The firm that supports the occurrence of the transaction will not be held liable for reimbursement of a defaulted loan. In addition, this form of investment does not possess FDIC insurance. If the respective borrower defaults and the firm initiates the collection based on the rebutted loan, it will collect 30 percent in service charges and then reimburse the difference to the lenders. Eventually, this will lower the expected value of the first loan amount that the lender invested. Consequently, the loans are insufficiently secure and considerably risky. Despite the beneficial nature of the borrower’s financial and credit information, the said data may be old when reflecting the real creditworthiness of the borrower. In other instances, the information given to the lending website may be intentionally incorrect or inaccurate.

What Would You Change?

In order to decrease the disposition towards default risks, I would ensure that the information offered by borrowers is legit. Hence, for a borrower to request for a loan, he or she must present data that illustrates his or her level of creditworthiness. For evidentiary purposes, the required information must be seconded by known financial institutions. In addition, the borrower should illustrate the rejection of his or her funding bids by providing proof of the respective information. Secondly, I would embark on the installation of web-based security frameworks that restrict situations that involve the use of incorrect or intentionally false information from borrowers. These structures will be modified in order to analyze the correctness or accuracy of the information provided by borrowers regarding their level of creditworthiness.

Why Would You Make The Change?

As asserted earlier, the issue of creditworthiness is imperative in this form of financing. The information that borrowers provide may not reflect their current financial situation. In this respect, lenders may be exposed to high default risks. Therefore, the implementation of such changes will assist considerably in determining the real status of the borrowers as well as their abilities to reimburse the loans accorded to them. Additionally, the application of the respective modifications will facilitate the introduction of new variables that may substitute the list of factors used by lending websites in understanding the creditworthiness of its clients. In this respect, borrowers will be subjected to other aspects that focus on gaining information concerning their ability to pay the loans that will may be provided to them.