P2P Lending (Peer-to-Peer Lending) is a model in which an online platform matches people or institutions that want to lend with individuals or businesses that want to borrow, without a bank taking deposits and lending them out. The platform scores borrowers, sets the rate, lists the loan for lenders who pick manually or auto-invest, collects repayments and earns fees rather than the interest spread. Credit risk stays with lenders, who have no deposit guarantee, and secondary markets can freeze when defaults rise. Many platforms now fund through institutions. In the EU, business lending platforms need an ECSP licence under Regulation (EU) 2020/1503, with a €5 million cap per project owner over 12 months.
How does P2P lending work
A borrower applies on the platform, which runs credit scoring, often adding alternative data such as bank-account transaction history. Approved loans are listed with a risk grade and rate. Lenders either pick loans manually or set an auto-invest rule, and each loan is usually split across many lenders.
A worked example: an SME borrows €100,000 over three years at 11%. Four hundred investors fund €250 each. The platform charges the borrower a 3% origination fee (€3,000) and the investors a 1% annual servicing fee on outstanding balances. If the platform's expected annual default rate for that grade is 4% and recoveries average 40%, investors' expected net return falls to around 7–8%, before any platform failure risk.
P2P lending risks
The credit risk sits with the lenders, not the platform. Investors in a P2P loan have no deposit guarantee, and secondary markets for selling loans early can freeze when defaults rise. Platform risk is the second layer: if the operator fails, someone has to keep collecting repayments, which is why regulators require wind-down plans.
Many platforms later moved to institutional funding, with banks, credit funds and securitisation vehicles buying whole loans, so "peer-to-peer" now often describes the technology more than the funders.
Is P2P lending regulated
In the EU, lending-based crowdfunding to businesses falls under the European Crowdfunding Service Providers Regulation (EU) 2020/1503, which has applied since 10 November 2021, requires an ECSP licence and caps each project owner at €5 million raised over 12 months. Licensed platforms hold prudential safeguards of at least the higher of €25,000 or a quarter of the previous year's fixed overheads. Non-sophisticated investors must pass an entry knowledge test, and before investing more than the higher of €1,000 or 5% of their net worth they must receive a risk warning and give explicit consent. Consumer lending platforms fall outside that regulation and are covered by national credit rules instead.
In the UK, the FCA's rules from 9 December 2019 limit promotions to retail investors who are sophisticated, high-net-worth, advised, or certify they will put no more than 10% of their net investible assets into P2P agreements, and they require an appropriateness assessment for non-advised investors. Investors with two or more P2P investments in the previous two years can be treated as sophisticated, which removes the 10% cap.
For an acquirer, the value of a P2P platform lies in its loan-level performance data by vintage, its servicing capability and its licence, the last of which is covered under P2P lending licence.