There are numerous online platforms which allows individuals or investors to loan cash specifically to borrowers – with no banks acting as mediators. Such platforms are called P2P or Peer-to-Peer Lending platforms.
Definitively, what is a P2P Lending Platform? What kind of data model power these websites?.
Peer-to-peer lending, also abbreviated as P2P lending, is the practice of lending money to individuals or businesses through online services that match lenders with borrowers. Peer-to-peer lending companies often offer their services online, and attempt to operate with lower overhead and provide their services more cheaply than traditional financial institutions.
How does P2P business make money out of this?
P2P businesses earn from matching borrowers with investors at a small fee. The fees charges by P2P are marginally small compared to what is charged by our traditional banks.
Before we go into the data structure of a P2P Lending platform, lets take a quick dive into how it works.
How do Peer-to-Peer Lending Platforms Work?
- Borrowers registers for an account by supplying their personal details and other related information. The information collect may range from current and permanent living address, social security number (usually to check the credit scores of borrowers and confirm their identity), amount requested, purpose of the loan etc.
- Investors also registers for an account by providing personal details of themselves. Such details may include same information asked of borrowers and other relevant information like how much they want to invest, source of funds etc. It is important to note that information request of both borrower and investor must comply with KYC (Know Your Customer) regulations. To comply with regulations customers are required to go through Identity Verification. This is to protect you, prevent fraud, Money Laundering operations, transactions banned under the sanctions regime or those which fund terrorism
- The platform screens borrower’s profiles and grade them from A to F. Each platform employs different grading system. Other factors are taken into consideration before grading borrowers. Such factors maybe the credit scores, the location of the borrower and other extended data collected etc. The country of residence of a borrower could play a pivotal role as some countries are considered as High Risk countries.
- Investors maybe graded likewise but this factor maybe optional for a platform. In building fintech businesses, I have always advised investors to also go through rigorous KYC verification as a due diligence measure to verify the source of funds of the investors.
- The P2P platforms may also set loan terms, interest rates, withdrawal or processing fees. The loan terms and interests rates set maybe based on the customer’s ratings and the loan amount.
- Registered and verified investors can browse the platform and access all loan listings on the platform with detailed information including the loan ratings, interest rate, loan term and the ratings of the borrower. As a matter of privacy rules, the personal information of the borrower or investor are not exchanged.
- For an investor to fulfil the loan request, an investor may contribute a minimum amount or pay for the loan in full. This is at the discretion of the investor. For example; Janes request for a loan of $2000 to pay off Student loans. Investor Smith can see Jane’s loans request and may decide to invest either $2000 or invest $50 in support of this loan request which we will call ‘loan ticket’.
- As a measure to counter Money Laundering, it is. advisable to set Investments limits. A minimum and maximum amount maybe set including total investment per day and per month. And periodic KYC can be performed randomly.
- Once a loan ticket has been fulfilled or in other is funded completely, investors who have invested in this loan will release the funds to the borrowers. Usually the investors funds are kept in an escrow account.
- Once the funds has been disbursed to the borrower which they will withdraw via their indicated bank account, borrowers repay the amount in the form of EMIs (Equated Monthly Instalments). EMIs are collected in escrow accounts and are eventually distributed back to investors based on their shares in the loan ticket.
- An equated monthly instalment (EMI) is a fixed payment amount made by a borrower to a lender at a specified date each calendar month. Equated monthly instalments are used to pay off both interest and principal each month so that over a specified number of years, the loan is paid off in full.
- As the borrower pays part of the outstanding amount, it is then distributed among the investors based on their share of interest.
This is just a minimal conceptual overview of how a P2P lending platform works. There are other core functionalities that maybe present on such platforms. Other influencing factors may arise from the development requirements which is technical called Software requirement specifications.
A software requirements specification (SRS) is a document that describes what the software will do and how it will be expected to perform. It also describes the functionality the product needs to fulfil all stakeholders (business, users) needs. Read more about how to write an SRS document
In the Build a P2P with Django tutorial, we will discuss in a much detailed light some of the highlighting data models to consider in building such a platform.
Data Modelling for Peer-to-Peer Platform
In this image below you will see the data structure of the P2P Lending platform. Some databases hold just minimal columns for the purposes of demonstration. This will help you to understand the core of such platforms and the relationships that exist between tables.