Stockholm School of Economics
4307 Banking and Financial Intermediation
Term Paper
16th October 2015
Authors: Aatman Ajmera- 40743, Abhilash Badami-40744, Lampros Baltas-40757

New Business Models: Peer-to-Peer (P2P) Lending

Abstract: This paper evaluates the efficacy of the peer-to-peer lending model. While we primarily discuss the consumer loan market, the structure, principles and associated risks are fairly similar for other end markets as well. Contrary to popular opinion, empirical evidence from the limited available market data proves that P2P platforms do not have a lower cost as a percentage of loan receivables at this point compared to traditional banks. As these higher costs are primarily due to marketing activities, going forward, with scalability, they are poised to generate significant cost savings. Through our research, we conclude that P2P lending has a strong value proposition and the potential to disrupt the existing lending market, however, data quality, regulation and investor confidence will play a monumental role in determining the speed and magnitude of its success.

What is peer-to-peer lending?
Technological evolution, along with changing consumer behaviour, has led to a new era of innovation in financial services and subsequently more transparent and easy-to-use platforms.
One of the new business models that has evolved, is peer-to-peer (P2P) lending. In essence, P2P lending is a form of debt financing which allows borrowers and lenders to bypass traditional banks. P2P platforms are sophisticated web-based platforms that significantly reduce the time needed to process a loan. Even though the products offered by P2P platforms are similar to those offered by traditional banks, the most significant difference is that while traditional banks fund the loan from their deposits, P2P platforms merely connect the borrowers