In the wake of the 2008 financial crisis, banks started making consumer financing stricter. Cheap, quick funds became challenging to acquire. Some consumers found it difficult to get financing even though they had a good credit history. The environment of scarce funds and lengthy approval process became an opportunity for the alternative finance market, resulting in the growth of the peer-to-peer financing space.

Peer-to-peer financing utilizes online platforms to connect investors and SMEs, solving the issue of costly and time-consuming credit approval. The business model offers a cheaper and more accessible alternative funding solution. This type of financing has grown worldwide and has become one of the fastest growing areas of alternative finance. But will this growth continue in the future?

The growth of peer-to-peer financing

This financing connects individuals with surplus money to invest with those seeking funds. Add technology and alternative data utilization to the mix and you have a powerful new financing solution.

What was once a form of alternative finance is now entering the mainstream. The peer-to-peer financing industry is transitioning from its startup phase into adolescence and is moving fast towards becoming a high growth, mature, and stable market, which will bring significant benefits to consumers of financial services.

So far, the industry has grown up without any significant growing pains. Defaults have stabilized and the market has continued to grow.

Global opportunities

Globally, the market has shown tremendous growth. While it has not fully matured, the situation has created enormous investment opportunities worldwide due to financing gaps and increased interest in this type of financing services.

In different parts of the world, it is looked at differently. In Canada and the UK, for example, the financing platforms are regulated as an intermediary, while in Germany and France, regulators regard the financing as similar to banks. In the United States, regulations vary from state to state. India has a significant estimated worth of financing volume in just two years, while China’s market has grown exponentially over the past few years. The above shows how far peer-to-peer financing has grown since 2005, when the first platform began operating in the UK.

Challenges for the industry

As good as it appears right now, there’s still a long journey ahead to tackle. The financing market hasn’t yet reached its full potential. There are many out there who still aren’t comfortable enough with the relatively new business model to use its services.

Additionally, there are several factors that will determine the future growth of this financing.  If interest rates rise, the number of defaults may also increase. Leading digital financing platforms need to work around this or risk having the bubble pop. Either way, if the economy is overall doing well, the number of defaults would remain stable.

Another factor is competition from banks and other financial institutions. As digital financing platforms gain mainstream attention, financial institutions have begun to take notice. However, many banks have chosen to partner with strong players to widen their reach to the underserved segment at a lower cost.

So, will digital financing continue to grow in the future? All signs point to “yes” – as any market experiences a transition to reach maturity, new risks will emerge. But so long as platforms continue to guard and innovate against such risks, the future of digital financing is bright.

This article was written by Funding Societies, the first SME digital financing platform in Malaysia. We provide working capital financing for small and medium-sized enterprises (SMEs); we also offer investment opportunities with returns up to 14% per year. To learn more about us, click on our website here.

You can also see our up-to-date progress and statistics in Southeast Asia here.