Peer-to-peer lending platforms

How do peer-to-peer lending platforms make money?

A platform assesses borrowers, lists their loan requests and lets investors fund them, then collects repayments and passes them to investors. It typically charges borrowers an origination fee, deducted from the loan proceeds, and charges investors a servicing fee, a percentage of the outstanding balance or of the repayments. Some platforms also run collections, sell loans between investors and manage funds that invest in their loans. See fintech accounting.

How does a platform that only arranges loans account for them?

Where the loan contract is between the borrower and the investors, and the platform has no obligation to fund it or to compensate investors for losses, the loans are financial assets of the investors, not the platform. The platform is an agent providing services. Under IFRS 15, the origination fee is revenue when the loan is funded, because that is when the platform's service of arranging it is complete, and servicing fees are recognised over time as the platform collects and distributes repayments. Cash collected from borrowers and not yet passed to investors is held as client money, usually with a matching liability. See principal versus agent.

Peer-to-peer lending platforms: two structures

A platform arranges US$ 10,000 thousand of loans in a year, charging borrowers an origination fee of 3% and investors a servicing fee of 1% a year on outstanding balances. Consider two structures. In the first, investors lend directly to borrowers through the platform, which carries no credit risk. In the second, the platform makes the loans itself, sells them to investors a few days later and provides a guarantee that covers the first 5% of losses, which is more than the losses expected on the loans.

In the first structure, the loans never appear on the platform's balance sheet: it recognises 300 thousand of origination fees as the loans are funded and servicing fees over time. In the second, the platform originates the loans, so they are its financial assets at first. When it sells them, IFRS 9 asks whether it has transferred substantially all the risks and rewards. Because its first-loss guarantee absorbs more than the expected losses, it keeps substantially all the credit risk, so it cannot derecognise the loans: they stay on its balance sheet, with a 10,000 thousand liability to investors, and it recognises interest income on the loans and interest expense to investors rather than fees. See IFRS 9 derecognition.

What about provision funds and other protections?

Some platforms promised investors protection through provision funds, pools of money set aside from borrowers' fees to compensate investors for defaults. Whether a provision fund keeps loans on the platform's balance sheet depends on whether the platform is obliged to make good losses, how large the fund is relative to expected losses, and who controls it. A fund that the platform controls and that absorbs most expected losses points to the platform keeping the risks; a discretionary fund that is ring-fenced for investors and that the platform has no obligation to top up may not. Any obligation to compensate investors is at least a liability, measured under IFRS 9 as a financial guarantee where it meets that definition. See financial guarantee contracts.

How is servicing accounted for when loans are sold?

Where a platform derecognises loans it has sold but keeps the right to service them for a fee, IFRS 9 requires it to recognise a servicing asset if the fee is more than adequate compensation for the servicing, or a servicing liability if it is less. Where the platform never held the loans, its servicing is simply a service under IFRS 15, recognised over time.

When must a platform consolidate funds that hold its loans?

Platforms often set up funds or trusts through which investors buy loans, and sometimes invest in them or take fees linked to performance. Under IFRS 10, the platform consolidates such an entity if it has power over the entity's relevant activities, such as choosing which loans it buys and managing collections, exposure to variable returns, and the ability to use its power to affect those returns. A platform that manages the fund for a fixed fee and holds no investment in it is often an agent for the investors; one that holds a subordinated stake usually is not. See control under IFRS 10.

How does US GAAP differ?

ASC 860 sets the conditions for derecognising transferred loans, focusing on legal isolation and control rather than the IFRS risks and rewards test, so a platform with a first-loss guarantee may derecognise loans under US GAAP that it would keep under IFRS 9, recognising the guarantee as a liability instead. Servicing assets and liabilities are recognised for retained servicing rights, and consolidation of funds follows the variable interest entity model. See IFRS 9 and US GAAP compared.

This guide is general information. It is not tax or legal advice for your situation.