Peer-to-Peer (P2P) Lending is a financial technology (Fintech) service that allows individuals or businesses to borrow money directly from other individuals (investors) through an online platform, without going through traditional financial institutions like banks. These platforms act as intermediaries, connecting borrowers and lenders but do not carry the credit risk themselves.

How P2P Lending Works: Step-by-Step

1. Borrower Registration: Individuals or businesses in need of funds apply on a P2P lending platform.

2. Application Review: The platform verifies the borrower's identity and documents, and performs a credit scoring process.

3. Credit Scoring Display: The borrower’s creditworthiness is assessed and shown to potential lenders. Scoring includes various data such as income, financial history, etc.

4. Lender Decision: Investors/lenders independently choose which borrowers to fund based on this information.

5. Loan Agreement: Once a loan is funded, the borrower receives the funds and starts repayment as agreed.

6. Repayment and Return: Borrowers repay the loan with interest, which becomes the lender’s return on investment.
   
   

Features of P2P Lending Platforms

• Neutral Role: The platform acts only as a connector and does not lend money itself.

• No Risk Bearing by Platform: If a borrower defaults, the loss is fully borne by the lender, not the platform.

• Borrower-Lender Transparency: Lenders can view detailed borrower profiles before investing.

• Technology-Driven: Platforms utilize automated systems for verification, scoring, fund disbursement, and collection.

Differences Between Banks and P2P Lending Platforms

Banks and P2P lending platforms differ mainly in how they provide loans and handle risk. Banks use their own money or customer deposits to give out loans, and they take full responsibility if a borrower doesn’t repay. This makes banks highly regulated and cautious in lending. P2P platforms, on the other hand, don’t lend their own money. They act as a bridge between borrowers and individual lenders. The platform helps with credit scoring and loan processing, but if a borrower defaults, the lender, not the platform, bears the loss. Banks carry the lending risk, while P2P platforms shift that risk to the individual investors who choose to fund the loans.

Platform Responsibilities (Without Assuming Credit Risk)

Although P2P platforms don’t bear the financial risks, they are still responsible for:

1. Analyzing funding risk: Evaluating borrower profiles for scoring and lending suitability.

2. Identity Verification: Ensuring all borrower data and documents are authentic.

3. Loan Collection Assistance: Assisting lenders in collecting repayments from borrowers.

4. Risk Transfer Mechanisms: Offering optional services such as insurance or secured loans.

5. Monitoring: Ensuring that borrowers follow the platform’s terms and repayment schedules.
   
   

Legal Framework in Indonesia (POJK No. 10/POJK.05/2022)

Indonesia has established a legal framework for P2P lending, which defines it as "Information Technology-Based Joint Funding Services" (Layanan Pendanaan Bersama Berbasis Teknologi Informasi or LPBBTI).

• P2P platforms must not use their own money to fund loans.

• Platforms must provide accurate, verified, and up-to-date borrower data to lenders.

• They must maintain secure systems and protect borrower and lender data.

• Must follow standards for data protection in line with Law No. 27/2022.

Negative Aspects and Challenges of P2P Lending

While P2P lending offers benefits such as easy credit access and financial inclusion, it comes with notable challenges:

1. High Default Rates: Due to relaxed or inconsistent credit assessments, borrowers often fail to repay loans, causing losses to lenders.

2. Limited Regulation and Protection: Many platforms operate with minimal government oversight, putting investors at risk in cases of fraud or platform failure.

3. Fraud and Scams: Fake borrower identities, identity theft, and even Ponzi-like schemes have emerged on some platforms.

4. Liquidity Issues: Lenders cannot easily withdraw their money before loan terms are completed, making the investment illiquid.

5. Platform Failure Risk: Most P2P lending platforms are startups; if a platform shuts down, investor funds may be lost entirely.

6. High Borrowing Costs: Borrowers with low credit scores are often charged very high interest rates, making repayment difficult and trapping them in cycles of debt.

7. Sensitivity to Economic Conditions: Economic downturns can significantly increase the number of defaults, affecting returns for all lenders.

8. Privacy Concerns: P2P platforms collect large amounts of personal data. Breaches or misuse of data could lead to serious user harm.
   
   

P2P lending has revolutionized personal and business financing by removing traditional intermediaries and opening investment opportunities to the public. However, it shifts credit risk entirely to the lender, and without strong regulations and safeguards, both borrowers and lenders face serious challenges. Users must be well-informed, and regulatory oversight must continue to strengthen to ensure fairness and financial safety.