P2P & Marketplace Loan

A platform connects borrowers who want a loan with investors who want the interest. The platform underwrites, services the loan, and takes a fee — but historically did not lend its own money.

The investor's position is straightforward and easy to misjudge:

• You are the lender. A headline "8% return" is a gross interest rate before defaults, and defaults are not a tail event here — they are the expected cost of doing business.
• Diversification is not optional. One €5,000 loan is a coin flip. Five hundred €10 slices is a portfolio. Every platform's tooling exists to enforce this because concentrated retail lenders are the ones who lose money.
• The platform is not a bank. There is no deposit insurance, and in most jurisdictions no obligation to make you whole.

The honest framing: this is private credit in retail-sized pieces, with the same risks and less negotiating power.

The arithmetic that decides the outcome

• An unsecured consumer loan at 11% gross with a 6% default rate and 70% loss given default returns 11 − 4.2 − 1 ≈ 5.8% — before any recession.
• Losses are front-loaded and cyclical: defaults cluster 6–18 months after origination and rise sharply in downturns, precisely when investors want out.
• The default-probability tool and spread-duration calculators apply here unchanged — this is credit, wearing a website.

The three structural risks

Platform risk is the one investors consistently miss. Ask a specific question: if this company entered administration tomorrow, who collects the loan payments and where do they go? Good platforms have a funded back-up servicer and hold loans in a bankruptcy-remote structure. Weak ones have a paragraph of intent.

What happened to the original model

The founding pitch was disintermediation: cut the bank out, split its margin between borrower and lender. What the sector actually discovered was that a bank's margin is mostly compensation for underwriting, servicing, funding stability and capital — and that removing the bank removes none of those costs.

• Institutional capital displaced retail. Credit funds and banks now provide most of the funding on major platforms, because they underwrite better and price the risk properly. Retail is a small and shrinking share of a market it invented.
• Platforms became balance-sheet lenders. Several acquired bank charters or now retain loans. The model converged back on banking, with better software.
• Adverse selection is structural. A borrower who can get bank credit generally does. The marginal platform borrower is the one a bank declined, and the platform's model must be better than the bank's to profit from that — a strong claim, not a given.

The regulatory reset

The sector's history includes genuine failures: the UK's largest platform wound down its retail business after loan-book problems; China's parallel market collapsed from thousands of platforms to essentially none after widespread fraud and losses. Regulators responded with appropriateness tests, marketing restrictions, capital requirements and, in several jurisdictions, caps on retail exposure. The market that remains is smaller, better supervised and considerably more honest about what it is.

How to evaluate one properly

• Cohort loss curves, by vintage. Not a blended average — a platform growing fast shows flattering aggregate numbers because young loans have not defaulted yet.
• Recovery data, not just default data. LGD moves the answer as much as PD.
• Skin in the game: does the platform hold a first-loss piece? Aligned incentives are worth more than any provision fund.
• Loan-level data availability. Platforms that publish full histories invite scrutiny; those that publish summary statistics have chosen not to.

The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.