Peer-to-peer lending, also known as P2P lending or crowdlending, is a practice of lending money to businesses or individuals through online platforms that match lenders with borrowers in return for a fee. It is a way for borrowers to get funding without the involvement of banks, and for lenders to make a profit by investing in loans.
The peer-to-peer lending industry has grown significantly over the past few years. It arose as an alternative to traditional banks and financial institutions.
The P2P lending market is currently valued at $67.93 billion and is projected to grow its value to $558.91 billion by 2027.
Moreover, there are over 90 P2P lending platforms just in Europe alone, with total funding of over $16 billion and $424 million funded just in January 2021.
Peer-to-peer lending became increasingly popular due to its very specific nature.
First of all, it allows people and businesses to receive funds without the involvement of traditional banks and financial institutions. It often means lower fees, less complicated application process for borrowers, and quicker approval for loans. Some of the biggest P2P lending platforms estimate their average approval time to be less than 24 hours.
The criteria set by peer-to-peer lending platforms are much less restrictive than those set by banks and other financial institutions. This being said, it creates an opportunity to obtain funds for people who would otherwise be denied a loan at a bank.
In case of loans issued by the banks (and often other lending institutions), one of the main requirements is to have a good credit score and proven good credit history. When it comes to peer-to-peer lending, this requirement is not as strict – and in the majority of cases, it isn’t a requirement at all. Moreover, peer-to-peer lending platforms are also an alternative for those who have a very short credit history, or no credit history at all. In the case of traditional banks, it is one of the deciding factors, which often disqualifies an applicant from obtaining a loan.
Those aspects are especially important for those who cannot obtain a loan through traditional methods or are in a situation where time is an important factor.
For an investor (that can be an individual or a company), the process begins with opening their account on a website that provides P2P services. The investor (also known as the lender) makes a deposit of a certain amount of money they agree to lend out. It is possible for them to divide this sum into smaller amounts and invest in more loans, or issue a bigger loan without dividing the money.
For each loan applicant (private or a business) a financial profile is created, which includes information on the risk category, and the acceptable interest rate they are able and willing to pay, the term of the issued loan and preferred payment method.
The borrower and the lender are matched through the platform, based on their preferences and conditions accepted by both parties.
After the offer is accepted by both sides, the loan applicant receives the money. Monthly payments and transactions are completed through the platform. All of the processes are usually fully automated, but the lenders and borrowers might choose to bid and negotiate.
Peer-to-peer lending can bring risk for the same reason that it is attractive for those looking to raise their funds.
P2P lending platforms lower their criteria for candidates that are willing to apply for loans. This being said, it increases the possibility of obtaining a loan for those who couldn’t meet criteria set by the bank. Although it is one of the factors that make peer-to-peer lending attractive for many, this also naturally increases the overall risk.
Committing identity theft or using fake identity in order to obtain a loan or to invest can be exceptionally dangerous for all parties involved. It poses a risk of further fraudulent activity, such as money laundering.
That’s why identity verification is an incredibly important factor in the peer-to-peer lending industry. Appropriate, strong KYC strategy is the key to reduce the risk on both sides – those who invest in loans, and those who apply for one, as well as the lending platforms.
Money laundering is an illegal process consisting of making sums of money that were obtained through illegal or undisclosed activity, appear to have come from a legitimate source.
There are a number of ways in which criminal groups or individuals try to launder money, using various institutions, products, or other people in the process. Popularization of financial technologies and online banking became the reason for this type of services to also become a target of money laundering attempts.
One of the reasons for why peer-to-peer lending platforms became a place of interest for that activity, is the difference between the regulations across different countries. Those differences can be used by money laundering individuals in order to omit stricter rules and security measures by placing their money in countries that do not have such strict regulations.
Another big reason for why P2P platforms can become a target for money laundering attempts is the common lack of strict and reliable KYC strategies and identity verification processes. This poses a risk for various irregularities to occur, such as identity theft or identity forgery that can result in the increase of risk of fraud, money laundering and other serious crimes.
Although peer-to-peer lending might seem like a less formal way of dealing with loans because of the lowered criteria, the actions associated with lending and borrowing money are just as legally binding as in the case of banking institutions.
That’s why it is important for the P2P lending platforms to implement strong KYC strategies that ensure the safety and security of their business, as well as those involved.
For the owners of peer-to-peer lending platforms that offer their services for businesses, introducing those strong strategies will soon be a neccessity.
On 10th of October 2021, new regulations related to crowdfunding and peer-to-peer lending platforms are going to be implemented across Europe.
New regulations regarding crowdfunding and peer-to-peer lending will apply to platforms that were funded in European Economic Area (EEA), as well as platforms funded outside the zone that are willing to operate around EEA.
At the end of 2020, the European Commission has adopted Regulation (EU) 2020/1503 and Directive 2020/1504. The requirements licensing of P2P lending platforms were introduced, as well as new regulations regarding P2P platforms that offer their services to businesses. It will be necessary to obtain more detailed information about the owners of the representatives of businesses willing to raise their funds. One of the examples is verifying that the project owner does not have a criminal record and that it is not a legal person established in a high-risk third country or non-cooperating region.
It is also important to mention that the European Commission will review the operation of the Regulation by November 2023. One of the points that will be addressed as a part of the review, is whether crowdfunding and peer-to-peer lending platforms should be liable to The Fourth EU AML Directive as obliged entities. In this case, peer-to-peer lending platforms would be subject to stricter regulations, including requirements regarding onboarding processes and the verification of their identity.
Identity verification of customers in the banking industry and other financial institutions is essential. In the case of companies and platforms that provide their services stricte online, remote forms of identity verification are the only convenient option.
There are a few identity verification methods. However, it is important to remember that – in order to eliminate the risk of fraud and forgery, it is important to choose an option which will fully meet the requirements set by the regulations and provide effective protection against possible fraud.
Fully-Verified offers a banking grade video identity verification solution. In comparison to other identification methods, such as verification based on pictures of a user or identity documents, it gives the opportunity to verify each customer more thoroughly.
Video verification combines the power of AI technologies and machine learning (such as automatic validation of documents, face recognition technology) with a human factor (assessment of user’s behavior, validation of security features of a document, and so on).