According to estimates by the consulting company PwC, the P2P lending industry will grow to $150 billion by 2025. In this article, you will learn how to get a share of this rapidly growing market by building your own peer-to-peer lending platform.
What is P2P lending
This is a money lending mechanism, where creditors and borrowers are equal parties (individuals and / or companies) and the process is carried out without the participation of intermediaries in the form of banks, credit brokers and other traditional financial institutions. In most cases, such relationships are built on the Internet at special sites - P2P platforms.
Without intermediaries, the interest rate is lower and the investor’s profit is greater. The fact is that maintaining a bank is an expensive pleasure. It is necessary to rent or purchase premises, staff, buy computer equipment and special software. And follow all safety rules.
Multiply these expenses by several branches, and you will understand why in the same bank the credit rate can be at the level of 10%, and the deposit rate - 2%. The bank eats up most of the profits of investors.
In peer-to-peer lending does not need to take into account the cost of banking real estate, staff salaries and expensive equipment. Therefore, the loan rate can be at the level of 10%, and the investor's benefit - 8%. The remaining 2% will leave the P2P platform.
Such lending works in a simple way:
1. People register on the P2P platform as a borrower or lender (investor).
2. The borrower submits an application for a loan, specifying the amount, terms of the loan and brief information about himself.
3. The platform assesses the risk, determines the credit rating and sets the appropriate interest rate. This is done by oracles (people or organizations hired from outside) and / or special algorithms.
4. The application goes to the total pool that lenders view.
5. If the loan conditions are suitable for any of the lenders, a loan agreement is made.
The only difficulty is the P2P platform itself. The site should be comfortable, reliable, secure and support a large number of languages (this will increase the reach of the audience). It is difficult to create such a platform, but if you approach this wisely, you will have every chance of success.
How to build a peer-to-peer lending platform
Step 1: Decide on a business registration form
When choosing a form of registration of a legal entity, such moments should be taken into account:
- Registration as a corporation or a limited liability company will protect against creditors in the event of bankruptcy or force majeure.
- Corporations impose significantly more requirements than LLCs, including requirements for accounting and tax reporting. In addition, corporations must hold shareholder meetings at regular intervals.
- Different forms of registration imply different tax statuses, but an LLC can choose to pay taxes as an LLC or as a corporation.
- The corporation is obliged to distribute profits and losses according to the share of ownership of each participant. In LLC distribution occurs according to the operating agreement, the terms of which are determined by the participants of the company.
Step 2: Register the company name
Usually, a company (trademark) must be registered in the state in which the business will operate. For P2P platforms, this is the main office location. At this stage, you need to take into account such moments:
- The name should be free, which can be checked on the website of the United States Patent and Trademark Office.
- The brand name does not have to match the domain name.
- Registration rules may vary widely by state.
- It is desirable that by the name of the company people can understand the scope of activities and the registration form (this is mandatory). For example, P2P Lending, Inc., if it is a corporation, or P2P Lending, LLC, if it is a limited liability company.
Step 3: Register the platform domain
Domain is your website address. It should not be very long and easy to read. Abbreviations are welcome if this is an abbreviated name of the brand. The important points at this stage are:
- Domain, as well as company name, must be unique. Check whether a domain is free or not can be on many sites that are easy to find using Google.
- Domain registration requires money. As a rule, these are small amounts - up to $20, but there may be exceptions depending on the domain zone - $ 100 or more.
- When registering a domain, you do not get it into the property, but rent it.
Step 4: Create a team
This is the main success factor of any project, so the choice of the team must be approached with the utmost seriousness. To do this, follow these recommendations:
- Staff need to be staffed with people who know how to operate a website and are experts in finance, financial law, marketing, or advertising.
- In addition, we need people with experience in the banking sector who understand how to build a credit business and assess credit risks.
- You need to hire people with a long-term focus, that is, immediately offer long-term contracts and social packages with accumulating bonuses.
If possible, it is better to lure employees from other companies, preferably successful ones. Such people have the experience, the necessary skills and understanding of the task. In addition, so you a little bit, but shake the position of competitors.
Step 5: Raise money for start-up capital
In addition to the content of the site and other operating expenses at the start, you will need money to issue first loans. Do not expect that P2P investors will immediately come to your site. You can collect money in the following ways:
- Primary Coin Offer (ICO / STO). You can create tokens that will bring dividend profits or reduce commissions.
- Attracting venture capital. To do this, you need to make a detailed business plan and reach out to business angels - people who invest a lot of money in exchange for a share in the business.
- Bank loan. Need a solid pledge.
The amount of startup capital depends on the cost of developing the platform, team size and marketing strategy. The price of creating a platform for P2P lending fluctuates around $10–200 thousand. It will take the same amount on marketing promotion, if you use bounty campaigns - a little less.
Step 6: Develop a P2P Platform
The platform can be created from scratch by hiring a blockchain programming team or by outsourcing the development. However, it is better to use solutions like White Label — ready-to-use products that can be customized. When using White Label, it is important to remember such things:
- These are sample solutions that are not suitable for unique credit products. White Label can integrate your own credit scenarios, but this will require hiring the appropriate specialists.
- It is better to use open source white label. Such products contain fewer errors and are more trusted by users.
The development time of the P2P platform from scratch is from 4 to 12 months. With White Label, this time can be cut in three. Cost will also decrease.
Step 7: Create a web portal
When creating a site for peer lending, it is important to consider such moments:
- The portal must be integrated with the maximum number of payment gateways.
- The site interface should be intuitive and support several major languages.
- Some White Labels include basic website design. Use it only as a draft. Your site design must be unique and recognizable.
Step 8: Testing the site and platform
Each custom platform usage scenario needs to be tested and ensure that everything works as it should. In this case, most of all attention should be paid to:
- Security. The connection with the user and payment gateways must be encrypted, personal data is hidden behind seven seals, and financial gateways are closed for 1000 and 1 lock.
- Usability. The user at the first transition to the site must understand how to register, apply for a loan or invest money.
- Performance. You can find out the speed of loading a site on different devices using the PageSpeed Insights service. There are also tools to improve portal performance.
Step 9: Platform Launch
Before launching the site, you need to conduct a marketing campaign, offering first users - borrowers and investors - discounts, lower (or higher for investors) interest rates, more loyal conditions for granting a loan and the like. But you need to remember about:
- Scammers who want to get a loan and disappear. There are a lot of such people at the start, as there is a chance to find loopholes in the risk assessment or user identification algorithm.
- Hackers who can launch phishing resources, try to hack a website or launch a DDoS attack (ordered by competitors).
Step 10: Starting the Technical Support Service
Despite all the precautions, testing and debugging, the platform after launch will almost guaranteed to contain errors and bugs. And most likely, they will not be detected by full-time specialists, but by users. Therefore, it is important to quickly start a support service that will work with the maximum load in the first few months.
Thanks to this will succeed:
- Catch and destroy most of the errors and bugs.
- Understand what was missed at the time of development, and promptly add missing features, elements or instructions.
- Get feedback from users and understand what needs to be improved to make the platform more convenient and understandable.
How to comply with government regulations
Hire a lawyer. The lending market is highly regulated, so a lawyer in the state is a prerequisite for the work of any organization that is engaged in business in this segment. You need to hire a lawyer before you:
- draw up standard loan agreements;
- sign the first loan and / or investment agreement.
Work with banking professionals. A startup team must have at least one person with education and experience in the banking sector. It is needed to ensure the relevance of credit products and the compliance of procedures with industry standards. In particular, it is necessary to ensure compliance with the Law on Electronic Transfer of Funds, the Law on Private Credit Reporting and the Law on Bank Secrets.
Establish anti-discrimination policy. Federal consumer credit laws prohibit the use of discriminatory lending practices (not all, there are exceptions).
One should also be aware of indirect discrimination, when seemingly neutral on paper criteria for selecting borrowers in practice put representatives of a certain group of people at a disadvantage compared to other groups.
Make a comprehensive loan agreement. The agreement must comply with the “Truth in Lending” Law, which establishes uniform methods for disclosing credit terms:
- All terms should be set forth and disclosed in words that all parties to the transaction will understand. Examples include traditional bank credit agreements.
- The contract must contain not only credit conditions, but also fines, late fees, partial payments or refusal (impossibility) to repay the loan.
Remember local and international laws. In some states there may be additional requirements for organizations that are engaged in peer-to-peer lending. International laws are mainly aimed at combating money laundering and the financing of terrorism, sometimes with the withdrawal of money in offshore zones.
Remember the cryptocurrency laws. If you raised money with ICO / STO, you need to register with the SEC. If digital assets are used only as means of payment, you need to remember that the growth of cryptocurrency quotes can lead to the formation of investment income, from which you need to pay taxes.
Which White Label can be used to create P2P lending platforms
Rebuilding Society/White Label Crowd. Rebuilding Society - tools for launching P2P lending platforms. White Label Crowdfunding - a subsidiary that simplifies the creation of new P2P sites.
Zidisha’s Open Source Platform. An open source platform that specializes in issuing microloans to businesses in developing countries.
Cloud Lending Solutions. It offers investor management, integration of credit bureaus and loan split. Cloud Lending Solution software will also help with back-office processes (creation, underwriting, financing and servicing market loans).
Agriya’s Lending Software. Web development company with head office in India. Specializes in software for creating peer-to-peer lending sites and other types of crowdfunding platforms.
Strategic Information Technology. Includes several software products that can be integrated into the loan platform: retail banking software, lending tools, debt collection and investment functionality.
Madiston. Allows you to customize your own credit model, conduct reverse auctions, as well as automate lending or bidding.
MyAzimia. Offers payment integration, credit management, reporting, and more. It is distinguished by the presence of simple and visual video tutorials on creating peer-to-peer credit platforms.
Crowd Valley. Platform for creating sites of P2P-crediting with a “white label”. The software includes a customizable module for issuing loans, application forms, electronic signature functions, matching algorithms for borrowers and lenders, and much more.