The emergence of and subsequent growth of peer-to-peer (P2P) exchanges over the past few years is mainly due to the fact that companies who want to borrow money are looking for appealing alternatives to traditional banks.
The growth is also driven by appetite by retail investors – as it enables them to invest alongside professional investors in start up, early stage and growth businesses through equity, debt and investment fund options. Institutional investors are also realizing that P2P lending is becoming the way of the future and are seeking to provide niche forms of investment for their clients.
As the merits of investing through P2P marketplaces continues to grow, it is inevitable that the industry will also continue to evolve. In a marketplace where traditional P2P providers don’t want to visibly show secondary prices that are generally much lower than the original investment. There is an opportunity to set up a secondary market that provides liquidity to enable investors to buy or sell their positions.
A secondary market will also encourage participation – particularly for longer-term loans. As oftentimes investors don’t want to invest for long periods of time. So if they know there is a secondary market where they can sell out and easily get their money back, they will be more apt to participate.
However, the challenge in the industry right now is the lack of secondary markets. One solution to this problem is to use an existing online marketplace technology to set up a secondary market that collects all of the P2P loans from different exchanges and an independent marketplace to sell them.
Using an enterprise-level auction and trading platform to create a secondary market
Using the ideas we outlined in our last post: ‘3 Key Elements to Kick-start a New Market’ we will now share how an enterprise-level auction and trading platform can be used to create a secondary market for a P2P exchange.
- Opportunity to create a new marketplace. The increasing adoption of P2P exchanges and the existence of very few secondary markets have created the opportunity.
- Dealing with the inclination toward anonymity. As mentioned in our last post, in the bond markets in the US there is a tendency for buyers and sellers to remain anonymous. Using a centralized marketplace and creating separate seller and buyer owned markets, which feed anonymous transaction data into an aggregate market price can benefit all participants.
- Overcoming the vested interests. Like anything, there will be those who are resistant to change – such as increased transparency. In the case of P2P exchanges, there is a natural evolution toward the need for secondary markets. Without secondary markets, there will be hesitation to participate in P2P loans. So creating and showing adoption of a centralized marketplace will allow both speculators and participant’s benefit from the transparent pricing and the resultant understanding of their current positions.
- The awareness of the benefits of the new market. In addition to being more effective than single crowd funding companies, there are many benefits of using an enterprise-level auction and trading platform to create a secondary market.
These benefits include:
- Creating transparency – in addition to the fact that traditional P2P providers don’t typically want to visibly show secondary prices that are generally lower than the original investment.
- Increased liquidity and participation – it’s one thing to have a secondary market, but having a centralized place where investors can seamlessly buy or sell securities will undoubtedly increase participation simply through depth of engagement.
- More inventory – a centralized marketplace will encourage more participants and therefore increase the amount of inventory. Which is good for both buyers and sellers.
- Competitive Pricing – increased transparency, liquidity, participation and access to more inventories will naturally lead to greater supply and demand and therefore competitive pricing.
- Increased efficiencies – a centralized marketplace will allow buyers and sellers to be matched more efficiently and quickly.
At Perfect Channel we have a proven track record of creating custom online marketplaces in various industries. Contact us to find out how we can help you reach new customers, optimize pricing and gain real-time trading insight.