The onset of online P2P lending changed the game for many entrepreneurs. It was a whole new financial revolution that provided an alternative source of financing, one that bypassed traditional lending institutions and offered greater accessibility, flexibility, and speed in obtaining funds for their business ventures.
In simple terms, it created a virtual marketplace where individuals who needed money (borrowers) could connect with individuals who had money to lend without involving traditional banks or other financial institutions. According to a report by Statista, the global P2P lending market is expected to grow in the coming years, which is estimated to reach a market volume of $558.9 billion by 2027.
So how does an online peer-to-peer lending business make money? In this article, we’ll take a deep dive into a P2P business model and the ways in which you can generate revenue from it.
How Does An Online P2P Lending Business Work?
A P2P business works by connecting individual borrowers with lenders through an online application or website. The process is rather simple, where investors who wish to invest money in the form of loans, starts an account with the P2P platform and transfer the money to their escrow account. Similarly, individuals who wish to borrow money sign up on the platform with their financial & personal details to avail loans. The entire process, which includes assessing creditworthiness, managing loans, processing payments, and handling collections, is overseen by the P2P platform.
Initially, a borrowing applicant submits their financial details which is considered to give them a risk rating. This will determine the rate of interest the borrower has to pay. Then, lenders may choose from various loan requests and select the ones they consider to have a satisfactory balance between risk and potential reward. After the loans are funded, interest payments kick in as borrowers start repaying their debts according to the agreed schedule. The distribution of funds and the timely collection of loan payments are efficiently managed by the peer-to-peer lending platform.
In short, it sort of becomes the guarantor and ensures that both parties fulfill obligations. Upstart, Commonbond, Pagaya & Sofi are all examples of online peer-to-peer lending businesses. If you’d like to read more about various P2P platforms, check out our blog on Best P2P Lending Apps & Networks Today.
How Is Revenue Generated In P2P Lending Business?
There are a few different strategies through which peer-to-peer lending platforms earn revenue. Before we get into details, it’s essential to understand that different platforms may adopt different strategies and what works for one may not work for another. Primarily, P2P platforms generate revenue by charging fees to both borrowers and lenders, although the specific fee structure can vary between platforms.
Let’s take a deeper look into the various ways these platforms can make revenue:
1. Fee Charged From Borrowers
Most P2P platforms often charge borrowers an origination fees, which could either be a percentage of the loan amount or according to a fixed scheme. This fee usually covers the administrative costs associated with processing the loan application, conducting credit checks, and facilitating the loan disbursement. Additionally, some P2P platforms may also charge borrowers servicing fees for managing and servicing the loans throughout their duration.
2. Fee Charged From Investors
Some P2P platforms also charge their investors (lenders) certain fees related to their investment activities. This could come in the form of fees based on the amount of funds invested or a percentage of the interest earned on their investments. For example, if an investor decides to invest $1,000 in a loan, the platform may charge a 1% investor fee. In this case, the fee would amount to $10 (1% of $1,000). The fee is deducted from the invested amount, and the remaining $990 is actually lent to the borrower.
Additionally, a few platforms provide secondary marketplaces where investors can buy and sell existing loans. In such cases, they may charge a transaction fee on the corresponding sale or purchase.
3. Late Payment Fees
This is charged from borrowers if they fail to make their loan payments on time. These fees work like penalties and encourage borrowers to meet their repayment obligations promptly. The late fee structure can vary depending on the platform and the terms agreed upon the loan agreement. These fees contribute to the platform’s revenue and helps in offsetting the costs associated with handling overdue accounts.
4. Advertising and Partnerships
Online peer-to-peer lending platforms also have the opportunity to generate revenue through advertisements & brand collaborations. They may offer advertising space on their website or enter into referral agreements with partner organizations, earning fees or commissions for successful customer referrals. Oftentimes, advertising is considered as a secondary source of revenue.
5. Data & Insights
P2P lending platforms accumulate a vast amount of data on borrowers, lenders, and loan performance. They can leverage this data to generate insights regarding user trends and provide analytics services to external parties, such as credit bureaus, financial institutions, or investors. By offering data and analytics solutions, platforms can generate additional revenue streams apart from their primary point of service.
Some platforms may adopt a combination of these methods, while others may focus on specific revenue streams that align with their business strategies and target markets. Throughout this blog, we have explored various revenue-generating strategies for online P2P lending businesses, including borrower fees, lender fees, late fees, and advertising partnerships. These revenue streams, combined with the scalability and customization potential of p2p lending software, make them an attractive business venture. The demand for P2P is on the rise, and there’s a whole lot of opportunity out there to attract both borrowers and investors.
If you’re planning to build an online peer-to-peer lending platform and capitalize on the opportunity at hand, then we can help you. We have an open-source peer-to-peer lending software for businesses called SocialWallet that’s exactly made for entrepreneurs who want to start a solid business in no time. Read on to find out more.
Building a P2P Lending Platform
Building and running an online peer-to-peer (P2P) lending business can be a lucrative venture if managed effectively. From the perspective of an entrepreneur who wants to start an online P2P lending platform, it is not only essential to do it better than the competitors, but also enter the market as soon as possible. Time and resources can be crucial here.
This is where iScripts SocialWallet comes in. This script for an online lending platform enables you to effortlessly establish your own peer-to-peer money lending platform quite easily, saving you valuable hours of time and resources. As a P2P lending business owner, you have the option to make use of this marketplace which brings together people who require credit with individuals and organizations that are ready to provide loans, all within one platform. You’ll have complete control over managing users, loan requests and listing, commission fees, payment flow, and much more, using the administrative dashboard of your marketplace. Plus, if you want to go further and launch a P2P lending mobile app, we provide iOS/Android applications for the same as well.
Having second thoughts? Well, go ahead and try out our demo! We’ve got a fully functional solution to run a profitable business and you don’t even have to start everything from scratch.