The Peer-to-Peer Lending Borrowing Vs. Intermediary Bank Based Lending Borrowing
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Changxin Shi
CoPIs:
Jiayi Zhang, Chenyifan Jiang
College:
College of Business and Public Management
Major:
Finance
Faculty Research Advisor(s):
Benito Sanchez
Abstract:
Lending and borrowing are widespread in our lives, and there are two major forms depending on whether the transaction is direct from the lender to the borrower: “Peer-to-peer (P2P) lending borrowing” and “Intermediary bank-based lending borrowing.” This paper analyzes the advantages of peer-to-peer and bank-based lending and compares the three most essential parts to lenders and borrowers.
The lending and borrowing from the bank-based system began thousands of years ago as currency had occurred (Beattie, 2023) (Labate, 2016), and the first bank in the United States was “The Federal Reserve Bank of Philadelphia” started in 1791 (Hill, 2015). Nevertheless, P2P lending and borrowing cannot be clearly recorded because it is straightforward for people to lend money to each other; however, the first well-organized firm “Zopa” was established in England in 2005, and the “Prosper marketplace” and “Lending Club” in the United States in 2006. So, if we focus on establishing and developing official institutions, bank-based lending has developed way longer than peer-to-peer lending.
Peer-to-peer borrowing is a newly born service in the 21st century and is one of the biggest rivals against bank borrowing (Kagan, 2020). Many factors make it survive among severe competition and grow as big as it is today. P2P borrowing is a very convenient way of making loans with huge accessibility. Moreover, P2P lending platforms often foster a positive bond among borrowers and lenders. No-middleman trading offers more personal interactions, creating a social connection between both parties, especially those seeking social and environmental goals. However, regarding the safety and reliability of P2P borrowing and lending, many people may be concerned about the default risk due to a lack of lawful regulation and supervision.
Bank-based lending has been around for thousands of years and has gained a reputation for trust and stability. Several bank characteristics can explain why a bank is an established institution with credibility and trustworthiness, for example, regulatory oversight, risk assessment and due diligence, and disclosure of loan information. Furthermore, Bank-based lending provides loans with a more significant amount, a wide range of financial products, personalized services, and repayment options.
Since P2P lending is riskier than bank-based lending, we suggest that lenders disclose loan information and develop a well-developed risk assessment system. Furthermore, we recommend using bank lending for borrowers who need vast amounts of money, but if the borrower lacks time, we recommend peer-to-peer borrowing.
P2P lending is much younger than bank-based lending and may not be as safe as bank-based lending. However, the growth of P2P lending and borrowing is remarkable, both in the number of loans and investors attracted by high returns expectations or socially responsible investment concerns (Serrano-Cinca et al., 2015). It has become a much more convenient, flexible method of lending and borrowing with excellent growth potential, which we believe will continue to develop better in the future.