Enhancing Security, Transparency, Efficiency: Role of Technology In P2P Lending

P2P lending is increasingly emerging as an alternative to traditional lending methods, and undoubtedly, technological innovations have contributed to its adoption.

Peer-to-peer (P2P) lending has been gaining traction in India in recent years as an alternative to traditional lending institutions. With around 1.7 billion adults remaining unbanked in the global economy, P2P lending has emerged as a viable alternative for borrowers and lenders where individuals as lenders raise loans that are paid back with interest by the borrower. This lending model uses an online platform matching lenders with borrowers to provide unsecured loans. The borrowers are individuals requiring a loan, and the interest rate may be set by the platform or by mutual agreement between the borrower and the lender. 

Since its inception, this concept has captured the market globally; however, for India, it skyrocketed when the RBI issued guidelines on P2P lending in 2016, thus giving legitimacy to the arrangement.  According to a report by Acumen Research and Consulting, P2P Lending is set to garner a market size of $804.2 Billion by 2030 growing at a CAGR of 29.1 per cent from 2022 to 2030. 

Acknowledging that technology has been instrumental in fostering the peer-to-peer lending landscape is crucial. The entire process, from loan origination, fundraising, and disbursals to repayments, is conducted digitally, making digital technology the spine of any P2P lending platform. Additionally, as this system emerges as an alternative to traditional lending institutions, leveraging digital processes has allowed individuals to cut down costs significantly and combat the issue of transparency, which is a key issue across the globe. 

Three T's Of P2P Lending: Trust, Transparency, Technology

One of the key challenges that the P2P ecosystem is met with is the lack of information and transparency. Unlike banks and other traditional financial institutions, P2P platforms are essentially tech companies acting as aggregators for lenders and borrowers. The platforms are not liable for loans that are delayed or defaulted by the borrower and the lack of communication and transparency creates a sense of mistrust in the ecosystem. Some players adopted unhealthy rules to combat this issue, adding to worries of harmful consequences.

In order to tackle these issues, several platforms have come up with offerings to make the P2P lending ecosystem more transparent. Measures such as creating a database and providing investors with detailed information about the loans they are investing in, including the borrower's credit score, income, and other relevant financial information, help create trust. Also, since technology can help platforms secure real-time data and analytics, it can generate greater transparency and visibility into the lending process. 

Democratising Credit Access Using Technology

Peer-to-peer (P2P) platforms have the potential to leverage IndiaStack tools and protocols, such as OCEN, ONDC, as well as AA, to help foster seamless and effective execution of user experience. These advancements will make transactions faster, fairer and more secure in the years, with more transparency and trust.

P2P lending is growing unprecedentedly, creating newer investment platforms for all individuals within the fintech industry. Next-generation investors are shifting from traditional lending methods to explicit P2P lending apps. Using AI in P2P will further contribute to its growth, helping platforms eliminate biases in credit underwriting, making lending more inclusive, identifying patterns, and making accurate predictions regarding a borrower's creditworthiness. This offering eliminates the possibility of human biases unfairly influencing lending decisions, and consequently, more people can access credit and achieve their financial goals.

Way Ahead

P2P lending is increasingly emerging as an alternative to traditional lending methods, and undoubtedly, technological innovations have contributed to its adoption. While there is a substantial disparity between the demand for credit and its supply in the Indian economy, be it for individual borrowers or businesses, P2P lending has the potential to greatly benefit last-mile individuals by reducing the cost of credit, thus contributing to a true, financially inclusive ecosystem for all. 

(The author is the CEO of Rang De, India’s pioneering and only peer-to-peer lending platform focused on providing timely and affordable credit to unbanked communities)

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