What is Marketplace Lending?

Marketplace lending (formerly known as peer-to-peer lending), is the practice of lending money to individuals or businesses through online services that match lenders directly with borrowers, disintermediating the banking sector.


Since the marketplace lending companies offer these services entirely online, they can run with lower overhead and automated process, making their products (loans) more affordable to consumer while offering an enhanced interface, with real-time customer service.

As a result, lenders often earn higher returns compared to savings and investment products offered by banks while borrowers can borrow money at lower interest rates than with credit cards or other traditional lending company.


As an asset class marketplace lending grew exponentially over the last decade. On the one hand, strong demand was driven by investor’s search of yield in zero interest rates environment and uncorrelated, diversified assets. On the other hand, strong supply was driven by borrower’s satisfaction with the product, as it represents a fast, efficient access to credit at fair price.

Moreover, these loans have a beneficial effect to the borrower as they are typically used to repay back more expensive debt such as credit card debt, which in have much higher interest rate and are not amortizing, thus decreasing their interest rate costs and deleveraging faster.

Marketplace is a spin-off of the wider prime lending US market, which includes traditional loan issued by banks and credit union and, mostly, credit card debt. All these assets performed positively over the last 30-40 years.
Marketplace lenders use a mix of innovative and traditional credit assessment techniques driven by big data to correctly price the interest rates for each loan depending on the individual credit risk of each borrower and then place the loan requests on their marketplace for investors to choose from, depending on their risk appetite.

Marketplace credit assessment is typically driven by three pillars.

  • Firstly, the applicant borrower’s personal FICO® score, which the lender can access through the main credit bureau Transunion, Experian and Equifax. These bureau cover 90% of the US population and receive monthly updated performance on their individual credit history with all credit providers (mortgages, credit cards, leasing companies, consumer goods paid by instalments etc.). With this information, credit bureau creates a personal credit score of each consumer

  • Secondly, the lender performs an internal credit rating to determine the appropriate interest rate application to the loan of each borrower. This rating is determined by the FICO score and other information provided by the applicant such as their income, their total debts, (and consequently, their debt-to-income ratio), the amount requested, tenure and other proprietary features driven by big data and algorithmic / artificial intelligence analysis, which also include KYC/AML analysis
  • Finally, verification. The lender manually verifies the information provided by the borrower. Only a small section of the information does not require manual verification, when their algorism detects low probability of fraud




CONTACT

Tel: +44 (0) 20 3205 7143
Email: info@p2plending.fund