P2P stands for Peer-to-Peer, and comes from the world of computing. It is basically a network set-up that is not dependent on central coordination.
What some fintechs have essentially done, is remove this central coordination from the lending process.
Borrowers and lenders are directly connected through a digital platform, with no traditional financial institution acting as a middleman. The result is the possibility for both sides to access better interest rates than it would be otherwise possible.
Yet, that can bring its own difficulties, since the lenders must actively assess the information available and decide on whether a particular investment is worthy of the risk.
On the other hand, some platforms work on the basis of a four-party model, introducing another player in the relationship: the loan originator, who essentially is responsible for bringing in the borrowers.
This can raise some additional concerns. If an outside party is selecting the borrowers and projects to be funded, doesn’t that introduce a new layer of unclarity? As well as what’s in it for them? Why should they care?
Loan originators put down some of their own money into the project, aligning their interests with those of investors. They now have a reason to care: if you lose, they lose.
The amount put down by the loan originator therefore becomes a kind of seal of approval, tying your and their results to get the best performance of that loan.
Sounds interesting? Read my post about how P2P lending works for the full details on how things work, and my list of best European P2P platforms if you would like to check out some of my recommend platforms to start off with.