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Recent developments and future perspectives of p2p lending in Poland

Krystyna Mitręga-Niestrój

Department of Banking and Financial Markets Name of organisation: University of Economics in Katowice Address: ul. 1 Maja 50, 40-287 Katowice, Poland Fax: +48 32 257 7405

E-mail: krystyna.mitreganiestroj@ue.katowice.pl

Abstract: The article analyses the recent developments and future perspectives of p2p lending market in Poland. The main aim of the article is to present the state of the development of p2p lending in Poland. The article also attempts to show the perspectives of these services in the future. This has been done by the literature review of the selected topic but also by analysing the available data concerning the Polish p2p lending market. P2P lending is a booming and innovative financial service sector in many countries in the world. The p2p lending is also developing in Poland. However, the Polish social lending market is still tiny comparing to the British or American ones. Kokos.pl or Finansowo.pl – are the examples of web platforms offering such services, which gain more and more members. Kokos.pl remains the most popular and dominant player on the p2p lending market in Poland. Security is certainly one of the most important positive feature of this platform. The future perspectives of Polish p2p lending seem to be very promising, yet they depend on the situation of p2p platforms – among others: their security and transparency.

Keywords: p2p lending, Kokos.pl, p2p lending market in Poland

Biographical notes: Krystyna Mitręga-Niestrój holds Phd in Economics and works as an adjunct at the University of Economics in Katowice (Poland), in Department of Banking and Financial Markets. Her research interests include contemporary problems of international financial system, with a focus on financial crises and international financial cooperation, and also modern tendencies in banking and finance. She teaches undergraduate and graduate courses, among others in finance and banking and international finance. She is the Vice-Dean for Master's Degree Programmes at the Faculty of Finance and Insurance at the University of Economics in Katowice. She is the Director of the Join Master Degree in European Banking and Finance at the University of Economics in Katowice (the program held since 2005 in collaboration with the Nottingham Trent University and the Brno University of Technology).

1 Introduction

The revolutionary changes in information and communication technology and the rise of social networks significance in recent years stimulate the changes in almost every sphere of the human activity. The effect of these changes is the emergence of a new economic system based on the global network of interaction. Modern society, equipped with innovative communication and able to self-organise, can create new activities and products (also in the form of social out market production). The new emergent model of

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economy which is called ”sharing economy” or “collaborative consumption” is based rather on cooperation than on the competition. In the sharing economy, social value is improved by sharing and not by ownership. This new model of economy seems to give people sense of independence of governments and institutions.

The “natural environment” for the collaborative finance is Internet, which creates for its users limitless opportunities. This also reflects the present tendency of economic lives to become more self-sufficient, aware and independent. This tendency expresses the rising role and potential of cooperative prosumers, which are simultaneously producers and consumers.

The sharing economy manifests itself also in finance through the development of so-called “collaborative finance”. The main rule of collaborative finance is that financial transactions are “made” by people - without the intermediation of financial institutions. The collaborative finance manifests itself today through different activities as for instance peer-to-peer lending (p2p lending). P2p lending is gaining increasing popularity both in developed and in developing countries. This trend concerns also Poland – the country with a population of around 40 million, which offers a large market potential for the p2p lending, also from the point of view of the potential foreign investors.

The main aim of the article is to present the state of the development of the p2p lending in Poland. The article also attempts to show the perspectives of these services in the future. The article explores the literature of the selected topic but also analyse the Polish p2p lending market based on the available data. It should be underline that the p2p lending is a relatively young research field, especially in Polish literature.

1. P2p lending – outline of the concept

The concept of p2p lending (known also as peer-to-peer, person-to-person or social lending) is not new – because a loan between friends or members of a family existed long before modern financial system. However today’s networked world based on communication infrastructures that allows an unprecedented degree of communicating, interacting and collaboration within communities in transborder and global dimension is important catalyst for p2p development. The vast development of social networks is the main driving force for this new alternative financial service. Moreover, the p2p lending is an appropriate indication of the emerging network economy.

The basic principle of peer-to-peer lending is that lending and borrowing activities occur directly among individuals, bypassing the traditional financial intermediaries as banks or financial brokers (Nelson et al., 2009). In peer-to-peer lending individuals make unsecured microloans to other individual borrowers (Lin et al., 2009). The decision process of loan origination is given into the hand of private lenders and borrowers (Bachmann et al., 2011).

Therefore the traditional model of lending through financial institution - when a bank is gathering funds from depositors and loans it out to households, companies etc. – is changing from “people-financial institution-people” to “people-to-people”. The flow of funds is possible without the “expensive financial middlemen”. The lender “acts as a bank” in fact in a competitive environment. The lender can set the interest rate and judge if this interest rate is competitive and can attempt to assess the risk of the borrower. The lenders are supported by p2p platforms in the credit checking, risk assessments and administration (p2pmoney, 2013). There are different types of p2p lending platforms:

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some of them connect borrowers and lenders directly and the others link them via a third-party intermediary (Galloway, 2009).

The development of p2p lending is undoubtedly the proof of the phenomenon of financial disintermediation, which means the reduction of the role of financial intermediaries (mainly banks) in, among others, the deposit and loan transactions, in favour of direct transactions among the market participants. According to Everett (2010) the disintermediation of loan contracting allows investors to deal directly with borrowers and what is important - without costly monitoring responsibilities. However, the monitoring does still occur, but in p2p lending is performed by peers (borrower and lender) rather than by an intermediary. The recent global financial crisis had a significant impact on the disintermediation phenomenon, because it led to a decline in confidence in the banking sector and caused the searching for alternative ways to invest capital and financing apart from the traditional banking.

P2p lending allows lenders and borrowers, with different property and social status, to agree on conditions of the transaction fast, and most importantly - on interest rate that suits them. Social lending transactions take place very often on the principle of an auction, through the Internet, most often on portals specialized in such services – p2p Web sites. Herzenstein et al. (2008) find that P2P loan auctions are democratizing personal consumer loans, by giving access to cheaper unsecured credit to all consumers.

Using specialized databases and websites permits to - among others - search for loans, to check borrowers profiles quickly and reduce the transaction costs. This is an important feature of p2p lending because the participants of the transactions can be characterized by the different degree of separation. They can be: the members of one family or friends, but they also can be unrelated - coming from the same region or country or even be “global participants”. Other feature of the p2p participants is that the lenders and borrowers frequently are individuals or small and medium-sized enterprises, however this may vary according to the country and web portal. Considering types of the loans: they are mainly arranged for consumption, small business activity, studies, but there are also offers for mortgage loans.

Taking under consideration the lending motives, the p2p transactions can be divided into three categories (Nelson et al., 2009) and (Peer-to-Peer Lending, 2008):

1) P2p lending driven by economic motives – lenders are reaching for profits and expecting high rate of return from their investment, while borrowers use p2p lending for e.g. financing consumption, consolidate or pay off debts (the examples of p2p platforms – Prosper, Zopa).

2) P2p lending driven by social motives – lenders are searching not for profits but for charity aims, from purely altruistic reasons (for instance helping entrepreneurs in poor countries, or people in unfavourable social condition, to improve living conditions), while borrowers are persons with particular problems (the examples of p2p platforms – Kiva, Grameen).

3) Other p2p lending concepts - like e.g.”Family and Friends” lending model – where lenders and borrowers are persons who already have had relations; the main task of the p2p platform is in such case to facilitate the legal aspects of the lending transactions (the examples of platform is Virgin Money US).

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P2p lenders can invest capital in projects which they deem reliable, for proposes they are convince of, and to people they can even be acquainted with. What's more, the potential borrower can present his or her personal situation and references of other persons to convince the lenders.

Getting a loan through p2p platform is in general not complicated and takes only a few very simple steps (Lorette, 2013):

1) Finding and registering with the website that offers p2p lending (most sites require no fee to sign up).

2) Entering the personal and financial information - such as driver license number, social security number and bank account information, is required for the company to verify the user identity (it’s important for verifying and checking customer credit score).

3) Providing information concerning the loan - its purpose, size, time and the level of the interest rate (which the borrower is ready “to pay”).

4) Waiting for the results of the auction, during which the offer of the potential borrower finds the ready to grant it lenders (if conditions of the offer are competitive the costs of the loan could be lower).

5) Deciding – acceptance of the loan if the borrower approves or withdraws the listing if does not (although some fees may apply if the potential borrower withdraws after the bidding has ended).

6) Making payments, usually at monthly basis (in practice is usually done by automatic withdrawal from lender’s bank account).

It is also possible to find platforms, where potential lenders offer their conditions and borrowers select the offer that suits them best. In case of p2p financing a possibility exists that one lender lends money for one specific borrower, however, due to the diversification of the risk, lenders prefer the allocation of resources to the bigger number of borrowers with different credit scores. The p2p loans could be: secured loans (require collateral e.g. a car) and unsecured loans - in this case lenders base mainly on the credit worthiness of the consumer.

P2p lending market can generate benefits both for borrowers and for lenders, allowing the latter to earn a higher interest rate than they would earn in a bank (Herzenstein et al., 2008). However, it is important to note that p2p lenders and borrowers can face risks. According to United States Government Accountability Office Report lenders face the risk of losing their principal and, on the for-profit platforms, the interest on their investments. While borrowers face risks largely similar to those facing borrowers using traditional banks - such as unfair lending and collection practices. As set out in more detail in the above-mentioned report, the main categories of risks to p2p lenders include (identified by the major for-profit, p2p lending platforms in the US):

Credit risk – associated with probability of financial losses resulting from the inability of a borrower to perform on an obligation.

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Operational risk – connected with the possibility of unexpected financial losses caused by inadequate or failed internal processes, people or systems, and also from external events.

Liquidity risk - financial losses can result from an inability to liquidate assets.

Market risk - increase or decrease in the value or price of an asset or liability resulting from broad movements in prices can lead to financial losses.

Legal risk – negative tax consequences caused by incorrect interpretation of tax laws.

These risks arise the issue of p2p lending market regulation, which is now the problem widely discussed in many countries. It seems that one of the most important features of the p2p lending regulatory system should be flexibility, what would allow regulators to adapt without difficulty or delay to market innovations and changes (United States Government Accountability Office, 2011).

2. P2p lending market in Poland

P2P lending is a booming and innovative financial service sector in many countries in the world. The first p2p lending platform was Zopa founded in 2005 in the UK. In the United States it was Kiva founded in 2005, and in Germany Smava - in 2007. Since then various forms of lending platforms followed internationally. In 2008 there were 24 platforms existing worldwide (with twelve platforms in the US alone) and 33 different platforms worldwide in 2010. The total volume of loans created by ten leading P2P lending companies in 2010 was equal to 733 million USD (and among them, the biggest volume had Virgin Money US - 390 million USD) (Bachmann et al., 2011).

The biggest loan volumes are generated in the US market - the 2012 was the best year ever for the US p2p lending industry: loan volume between Prosper and Lending Club in December was USD 103.7 million and for the year the total was USD 871.1 million - a 162% increase in one year (Renton, 2012). Although the social lending develop also in other highly developed (e.g. Great Britain, Germany, and Spain) and developing countries (e.g. China, India, and South Africa). For instance, p2p lending is predicted to exceed GBP 300 million in 2013 in Great Britain (Peertopeerlendingtree, 2013). Fig. 1 shows new loans per month in selected p2p companies.

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Figure 1 New loans per month in selected p2p companies in USD millions (Peer-to-Peer

Lending, 2008) (State of Selected P2P Lending Companies, 2011) (P2P Lending

Volumes in July 2013, 2013)

Person-to-person lending as the new financial phenomenon is also developing in Poland in recent years. From point of view of the lenders it can be a very attractive way to invest capital, after analysing inter alia the level of interest rates, the situation in the financial market, other products offered by financial sector and of course risk connected with such an investment. The p2p lenders expect among others: better conditions than on banking deposits and the consciousness that they are more self-responsible for the capital management then in case of relaying on a financial institution. The lenders perceive p2p lending as transactions with more social dimensions and are satisfied knowing that their money can help other persons. From the Polish borrower point of view p2p lending seems to be a very good source of finance for persons who:

cannot obtain bank loan from different reasons (also because of their financial situation),

assess bank formalities to be too cumbersome,

consider the interest rate offered by social lending platforms more favourable compared to the banks,

have special needs or had problems with payments on their liabilities in the past,

treat p2p loan simply as the additional, easy source of funds (Owczarek, Stlemaszczyk, Janczewski, 2008).

In an emerging market country, like Poland the rising demand for funds can be observed because of the rising consumption needs (for instance a rising popularity of loans for on-line shopping in Poland).

In this context, it is worth examining the problem of loans to households in Poland. The ratio of household debt (incurred by resident households of the economy and including consumer loans and mortgages) to GDP is growing (fig. 2).

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Figure 2 Household Debt to GDP for Poland from 01.10.2008 until 01.04.2012 in % (Household Debt to GDP for Poland, 2013)

Although in recent years, the growth rate of loans to households is slowing down. Fig. 3

shows changes in growth rate (y/y) of consumer loans and housing loans to households.

Figure 3 Changes in growth rate (y/y) of consumer loans and housing loans to households January 2006-January 2012 (National Bank of Poland, 2013)

There are two main reasons of this phenomenon. Firstly, a continuous tightening of the banks’ lending policy, which started in the second quarter of 2008 and was caused by the deterioration in the value of the portfolio of already extended loans. It was among others a natural consequence of the slowdown in economic growth due to the global financial crisis (Sobolewski and Tymoczko, 2012). Secondly, the implementation of so-called Recommendation T that has forced banks to sharpen lending criteria and was designed to

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limit the access to loans for persons having other credit liabilities, and for customers with lower revenue - with liabilities exceeding 50% of their households' income (Watchdog KNF expects, 2010). Negative impact of Recommendation T induced the Polish Financial Supervision Authority to issue the amended in February 2013, which would give banks more flexibility in awarding retail loans.

Undoubtedly, there are conditions for the development of alternative forms of financing like p2p lending in Poland. What is important, Polish regulations do not require a bank for the p2p lending model. This causes the transaction costs to be very low (Exclusive Interview: Smava, 2009). It should be noted that social lending in Poland is taxed with 19% capital-gains tax, lenders are not taxed by VAT, but borrowers have to pay the tax on civil-law transactions equals to 2% of loan value.

In Poland social lending is ranked among the products of so called shadow banking, which means the offering of services and products typical of banks (they perform bank-like functions ) but outside the regular banking system. What’s more– the shadow banking is not subject to regulatory oversight – the Polish Financial Supervision Authority. The main legal regulations of shadow banking in Poland are the Civil Code and the Commercial Code. The “institutions” of shadow banking – the loan companies – offer particularly loans for persons who have difficulties with taking out a loan in bank or do not want to use of the banks’ offer and are seeking alternative financial products. The most often products offered by shadow banking in Poland are (Bankowość równoległa, 2013):

payday loans,

loans without BIK - it means loans without a verification at Biuro Informacji Kredytowej – BIK (Credit Information Bureau),

debt relief products,

p2p loans,

alternative investments.

According to the European Commission, the shadow banking can play an important role in the financial system because it can create additional sources of funding and offer other alternatives to banks (for instance deposits). But its functioning can also be a source of a number of risks for financial stability and some of these risks can be of a systemic nature (European Commission, 2012).

The market of non-bank loans in Poland is growing - taking into account both the size of the loans and the number of customers. The increase of revenues of loan companies can also be noticed, but the share of the rejections of a loan application in all loan companies’ loans is stable (table 1).

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Table 1 Main statistics about the market of non-bank loans in Poland (Bednarek, 2013)

2007 2008 2009 2010 2011 2012

Size of loans (USD millions)

463 586 555 617 648 710

Number of customers (in thousands)

926 957 903 995 1249 1358

Loan companies revenues (USD millions)

347 378 410 410 504 536

Share of the rejections of a loan application (%)

28 38 39 36 39 40

We must however remember that p2p lending transactions are not made through any intermediary such as for instance lending companies. Borrowers and lenders arrange the transactions, and p2p platforms make the transactions possible. However, their task is to check the borrowers’ credibility.

The platform Kokos.pl was the beginner at social lending in Poland in February 2008. The following portals began to operate shortly thereafter: Finansowo.pl, Monetto.pl (both in March 2008, however Monetto is not operating any more) and Smava.pl (equivalent to German Smava.de platform). During the first four years of the Polish p2p lending market the value of loans was estimated at PLN 130 million (approx. USD 43 million). It consisted only a small number comparing to the value of consumer loans granted by banks – more than PLN 127 billion (approx. USD 42 billion), as of February 2012. Almost half of this amount (PLN 61 million, approx. USD 20 million) was borrowed through the platform Kokos.pl, which so far has more than 180 thousand users. After five years (situation at the beginning of 2013) from launching the first p2p platform approx. half a million the Polish residents borrowed approx. PLN 250 million (USD 58.5 million) (5 lat pożyczek społecznościowych, 2013). The owners of the p2p platforms earn money mainly on fees charged for transactions. It should be noted, that the information about the p2p lending market in Poland is limited and current, comprehensive data are lacking.

The most players on the Polish social lending market are: Kokos.pl (with almost 80% share in invested funds through p2p lending platforms), Finansowo, Sekrata, Pożycz, SzybkoiPewnie, Bilonko, Zakra (Zestaw Narzędzi Pożyczkodawcy, 2013). The situation on p2p lending market in Poland is dynamic, however there is more positive tendencies associated with entering of the new players on the market, than the bankruptcies of the p2p platforms. The two examples of the latter are the collapse of Monetto.pl and Ducatto.pl. The Polish peer-to-peer lending market seems to be interesting for foreign p2p platforms (for instance the entrance of Swedish TrustBuddy in 2013).

Taking under consideration the information from the largest p2p platform Kokos.pl (the data include the 5 years period, from the launching of the platform) we can state that the statistical investor and borrower came from Masovian Voivodeship (is the largest, the most populous and the wealthiest voivodeship in Poland), are on average 34 and 33 years old. The statistical borrower borrows on average PLN 2,026 (USD 1.500) for 11 instalments. The average salary is equal to PLN 2,723 (approx. USD 2000).

At the beginning when first p2p lending platforms have launched a great part of Polish society was skeptical about such form of investing and borrowing. The threat of fraud and bankruptcies of p2p platforms hampered the development. However, thanks to

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changes and refining methods of verification the p2p platforms have became safer. The popularity of social lending is growing steadily in Poland. This trend is, among others, influenced by more attractive offer and promotions of p2p lending platforms.

3. Kokos.pl - the most important player on p2p market in Poland

Kokos.pl was the first p2p lending platform in Poland. The idea of the platform was established in 2005, but the concept was implemented in 2007. The work on the website began at the same time. After the legal and tax audits were completed the Kokos.pl started to operate in February 2008 and the provider of the largest social lending service at the very beginning was Blue Media. Blue Media is a highly innovative company that specializes in providing transactional services and delivering IT systems for institutions from telecommunications and financial sector (also banks) as well as for companies working within e-commerce and m-commerce (Background release, 2013). Kokos was a breakthrough and first-of-its-kind p2p lending service on Polish financial market.

Now Kokos.pl is the largest social lending platform in Poland, which brings together investors and borrowers. The main statistics concerning Kokos.pl (as at 07.09.2013) are shown below (Kokos.pl. Statystyki, 2013):

number of users’ accounts – PLN 222,357 (approx. USD 52,000),

capital delivered by lenders – PLN 4,249,938 (approx. USD 1 million),

awaiting loans – PLN 238,900 (approx. USD 56,000),

loans granted - PLN 93 438 650 (approx. USD 22 million),

finished auctions – 85413,

average interest rate - 18,68%.

The advantages of this platforms are (Kokos.pl. Loans and investments, 2009):

simplified procedures for taking out loans and investing,

quick transaction process,

transparency of rules for offered services,

safety of the system created on the basis of security tools,

easy-to-use navigation and Website operator's experience,

co-operation with acknowledged partners within the verification of users, loan insurance and vindication.

Loans from Kokos.pl are granted to both physical and legal persons. The borrower determines the conditions on which he or she wishes to receive a loan in the process of starting an auction: amount of the loan, number of instalments, interest rate and waits for a decision. The potential investors observe the auction, analyze the profile of the borrower (e.g. income, verification statuses) and ask questions. In order to gain the

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confidence among investors, the borrower should watch the auction and provide answers to the questions. Investors make their decision based on information regarding a user's loan-repayment history, amount of the salary, etc. The auction lasts 7 days. In the process of starting an auction or until the submission of the first bid by the investor, the borrower can extend the duration of the auction up to 14 days. If the borrower collects 100% of the capital before the end of the above-mentioned time limit, the auction will be completed ahead of time. The potential borrower can delete the auction until the first bid by the investor. By contrast, with the auction - the loan offer means that this is the investor who determines the conditions of the loan. Within 48 hours, the investor should confirm whether agrees to lend money to the given lender. After acceptance, the investor has 72 hours for payment. In case when the investor will not take the decisions or will not transfer money – the loan offer is cancelled. The lender can try to make an auction or search for another loan offer. The first loan granted to the borrower could be up to PLN 1,000 (approx. USD 330

1). Along with timely repayments and activity the limit increases

successively to PLN 2,500 (approx. USD 825), PLN 5,000 (approx. USD 1,650), PLN 10,000 (approx. USD 3,300) and PLN 25,000 (approx. USD 8,250).

The important feature of Kokos.pl is that it gives a high level of security of transactions and much stress is put on the borrower verification process. Through the verification process Kokos.pl among others (Zasady Weryfikacji, 2013):

confirms user’s profile through verifying the bank account,

checks user’s situation through - Biuro Informacji Gospodarczej InfoMonitor S.A. (BIG InfoMonitor - InfoMonitor Economic Data Office) which collects, stores and shares economic data about individual and corporate debts, Biuro Informacji Kredytowej – BIK (Credit Information Bureau), Związek Banków Polskich – ZBP (Polish Bank Association), Krajowy Rejestr Długów Biuro Informacji Gospodarczej SA - KRD (National Debt Register Economic Information Bureau), Rejestr Dłużników ERIF BIG S.A. – ERIF (Register of Debtors BIG S.A.), Centralna Ewidencja Dłużników Ryzykownych - CEDR (Central Evidence of Risky Debtors),

checks user’s address, ID card, phone number, salary, employment,

confirms data from the accounts or invoices issued by providers of telecommunications services or media with user data in the registration form.

The user rating is very important for the security of the transaction. It specifies how much and how many loans the user can take out. The rating improves with the timely redemption of loans and with time – from the date of opening the user’s account. The lack of timely payments decreases rating. The rating determines the estimated risk of investments – the lower the rating, and less possible ways of verification - the risk is higher. The most risky segments of users at Kokos.pl are holders of:

“one red star” (it means that the user has a negative entry in the databases checked by Kokos.pl); the user with “one red star” cannot take out a loan,

1 Assuming that 1 USD = 3 PLN.

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“one green star” (no negative entry in the databases and to get the second “green star” the user must timely pay the loans of PLN 500 (approx. USD 165) or more and have the active account for at least 3 months).

Repayment according to ratings (as at 07.09.2013) (Kokos.pl. Statystyki, 2013):

the lowest rating – the users with „one red star” and „one green star” – number of loans 1,501 and the amount of repayment instalments PLN 87903.65 (approx. USD 29,000),

the highest rating – users with “five green stars” - number of loans 2,428 and the amount of repayment instalments PLN 822,905.14 (approx. USD 272,000).

The total amounts of debts under collection is equal to PLN 14,180,400 (approx. USD 4.6 million). The ratio of payment promptness of all loans is very high up to 96.55%. Table 2 shows the main statistics about auctions and loans at Kokos.pl.

Table 2 Main statistics about auctions and loans at Kokos.pl (5 lat pożyczek

społecznościowych, 2013)

2009 2010 2011 2012

Total number of auctions 16,374 15,348 15,390 21,168

Number of auctions ended with loan 7,919 10,365 6,989 8,664

Average amount of the loan (approx. in USD)

523 690 972 827

The interest, as has previously been noted, which is one of the main factor taking under consideration by borrowers and lenders in their decisions in p2p transaction is nowadays equal 16%. All p2p platforms in Poland have the same maximum level of interest rate. This is a result of "anti-usury" regulation that is aimed at preventing excessively high interest rates. The purpose was to limit the maximum interest rate of a bank loan to the fourfold of Lombard rate, which now (September 2013) is equal to 4% (Osiński and Tymoczko, 2007). Table 3 shows the current average interest rate on cash loans in the 20 largest banks in Poland (% p.a.).

Table 3 The current average interest rate on cash loans in the 20 largest banks in Poland (% p.a.) (Oprocentowanie lokat i kredytów, 2013)

Type of loans Interest rate

Cash loans in current account 16.41%

Cash loans, term of the loan 12 month 15.32%

Cash loan equal to PLN 10,000, term of the loan 12 month, with

commission (real interest rate) 17.57%

Loans offered by p2p platforms 16%

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It is worth to mention that ‘express interest-free loans’ are an interesting novelty introduced by Kokos.pl. The borrower, who takes a loan and repays it within 14 days, pays no interest but only a commission of 0.5% to 5% (for the service provider) and the cost of new user verification - PLN 1 (approx. USD 0.75). This means that the cost of a loan of PLN 500 can be from PLN 2.50 for existing users of Kokos.pl to PLN 26 for new customers, provided the amount owed is repaid within 14 days (Express interest-free loans, 2013).

It therefore turns out, that the interest rate offered by p2p platforms does not diverge from those offered by commercial banks. But the conditions and procedures which have to be met by borrowers and lenders differ of course. Such a low level of interest rate can however limit the inflow of investors to p2p platforms. But when we compare the interest rate offered by p2p platforms with those offered by commercial banks – the banks’ offer looks less attractive (term deposit rates in the 20 largest banks vary from 3.30% p.a. for 1 month deposits to 4.51% for 12 month deposits) (Oprocentowanie lokat i kredytów, 2013).

It is not complicated to become an investor on Kokos.pl. An investor may be any natural person who holds a valid identity card, who registered the account in Kokos.pl and carried out verification of bank account. The potential the lender can invest from PLN 50 to PLN 5,000 after analyzing the conditions of auction. If loan has not been fully accepted by the potential borrower, the investor can move into another auction or decide about the repayment within 2 days. The borrower is required to repay the instalments until the 11th day of the month following the month in which the loan agreement has been concluded. The following ten fundamental principles of safety were taken into account at the moment of creating Kokos.pl (Bezpieczeństwo inwestycji, 2013):

1) Investment liquidity – the investor does not have to block funds or make any earlier transfer to any deposit accounts. He or she can give up the investment before the closing of the auction and transfer funds to any other ongoing auction.

2) Return on investment in the cash loans - the investor can achieve return on investment exciding more than 50% per year. This is possible thanks to the voluntary, advance repayments made by borrowers and the monthly capital payments plus interest, which the lender may then invest.

3) Obligatory verification of bank account - Kokos.pl checks whether the user is actually the owner of the bank account on which potentially the loan will be granted or the payments will be made.

4) Obligatory verification of borrowers - the system periodically checks the credibility of borrowers through Biuro Informacji Gospodarczej InfoMonitor S.A. and other already mentioned institutions.

5) Voluntary verification of borrowers – Kokos.pl allows every borrower to increase his or her creditability through verification of place of residence, place of employment and financial verification.

6) Ratings – affects how much and how many loans the user can make.

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7) Creating user’s own risk assessment model for an investment - starting with investments the user should carefully check a few key parameters of auctions, among others:

the number and amount of loans that are about to settle by the borrower,

the sum of the monthly instalments,

the number of days delay,

the voluntary verification of borrowers.

8) Borrower’s full accident insurance - the borrower has a possibility to insure the loan against a series of events that can result in the loss of his or her ability to pay the debt. Kokos.pl offers the insurances in cooperation with Cardif Polska S.A and Cardif Assurances Risques Divers S.A. - the insurable risks include death, disability to work and unemployment (Kokos adds insurance, 2008).

9) Investment diversification - the system allows granting loans from a few or a dozen or so lenders.

10) The development of new security measures in Kokos.pl – introduction of new methods of verification and insurance.

The important feature of Kokos.pl is that it is attempting to be the most innovative p2p platform in Poland and introduces new interesting product, such as for instance – SMS loans coupled with prepaid MasterCard PayPass card (Kokos Issues Prepaid Card, 2010).

Table 4 shows Kokos.pl in comparison with two others important players on Polish p2p lending market Finansowo.pl - P2P lending service that merged with German Smava to join forces in the Polish market and Sekrata – Polish platform, which debuted on the Internet in late 2010.

Table 4 Kokos.pl, Finansowo.pl and Sekrata.pl – comparison (Owczarek, Stlemaszczyk, Janczewski, 2008) (Kokos.pl, 2013) (Finanswo.pl, 20123) and (Sekrata.pl, 2013)

Kokos.pl Finansowo.pl Sekrata.pl

Borrowers Acquainted and strangers

Only acquainted (users who had confirmed their acquaintance)

Acquainted and strangers

Loans

Minimal amount 500 PLN

(165 USD1)

50 PLN

(16.5 USD)

100 PLN

(33 USD)

Maximal amount 25,000 PLN

(8,250 USD)

2,000 PLN

(660 USD)

50,000 PLN

(16,500 USD)

Price settlement Auction Auction Auction Repayment Monthly instalment One time payment Monthly instalment

Atomic scale design of carbon nanotubes 15

Maximum payment term 12 months 12 months Up to 12,500 PLN (4,125 USD) – 36 months

Above 12,500 PLN

(4,125 USD) – 48 months

Fees From borrower From borrower and investor

From borrower and investor

Security

Ratings Yes No Yes

Borrower verification

Verification transfer Yes Yes Yes

Telephone verification Yes Yes Yes

Verification in BIK Yes No No

Verification in KRD Yes No No

Verification in Infomonitor

Yes No No

Verification of ID Yes Yes Yes

Verification of income statement

Yes No Confirmation of employment

Verification in CEDR Yes Yes Yes

Agreement with collection company

Yes Yes Yes

Loan insurance (optional)

Yes No No

1 1 USD = approx.. 3 PLN

Kokos.pl remains the most popular and the most important player on the p2p market in Poland. The most important positive feature of this platform is certainly the issue of security and developed, in comparison to other Polish p2p platforms, system of verification. Kokos.pl is still the market leader and despite the competition from other p2p platforms, at present is hard to predict the change of this situation in the nearest future.

4. P2p lending – chosen issues

Lending and borrowing money are without a doubt the activities based on trust, the more it is need in investments and loans in social lending. One of the main problems in this type of transaction is imperfect information. “Due to imperfect information the distinction between risky and safe borrowers is less clear” (Losa, 2008). In conditions of imperfect information, there is a special case of asymmetry of information. The issue is that the lender does not know the borrower's situation as well as the borrower does (Ashta and Assadi, 2008). The asymmetry of information produces other special problems such as adverse selection - involving the displacement of better investment projects by worse projects (Pawlowska, 2012) and moral hazard – which means that the lender does not know whether the borrower will actually do as promised and not engage in different behavior after being granted the loan (Van Damme, 2011). For loans on p2p platforms

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could apply persons who have never ever received the financing through commercial banks. That is why the important risk is connected with increased activity of users with low creditworthiness. Users who built the ‘pyramids of debt’ by borrowing money for repayment of other obligations generate particular problem for p2p lending market. Such users “move’ among different platforms. They can create risks for the functioning of p2p lending market and can discourage new lenders. Paradoxically, the activity of such risky users can help the platforms to gain momentum, especially the new ones (Kisiel, 2011). P2p platforms argue, however, that they make every effort to get the full knowledge about a potential borrower and the lenders may learn to whom and under what conditions they lend money (very important are here the credit or users’ ratings). What's more, platforms encourage the lenders to diversify the "investment portfolios" by dividing the loan amount even on the dozens of borrowers. The users of p2p platforms should remember, however, that the loans granted by the Internet are characterized by a higher level of risk, also because they are a relatively new phenomenon especially in such a country as Poland. When creating investment portfolio the “p2p investor” should take under consideration also other possibilities as: bank deposits, Treasury bonds, investment funds and equities. For instance, Kokos.pl advises investors to put in p2p loans no more than 20% of its free resources for investments (Bezpieczeństwo inwestycji, 2013). The lender must always remember that even high rating and all verification do not guarantee timely loan repayment. There is always risk that the information about borrower is not valid and the lender has only the illusion of control.

Another problem of many p2p investors is that they do not invest enough funds to distinguish luck from investment skills. The interest rates in this lightly regulated area of financial services probably very often look “too good to be true” The procedures of credit checking and ratings used by p2p platforms could be not transparent. There is always a danger in case of platforms, which are able to approve a loan in minutes with only a few pieces of information (Jenkins, 2013). The important question arises: is social lending more investing or rather more gambling. The gain of the lender is strictly limited to the interest rate and he or she can lose 100% of the initial capital. What’s more, because of the novelty of the p2p platforms and problems with adequate stress tests the probability of gain or loss is impossible to define. The investors could also succumb to visions of high returns because of the strong marketing action of the p2p platforms, which also make both borrowers and lenders feel like members of exclusive clubs. (Tresidder, 2013).

The lenders should also bear in mind that lending decisions are made only by themselves, and p2p platforms are not responsible for their decisions. The platforms are not liable for the consequences and are not a party to the contract (look for instance Bezpieczeństwo inwestycji, 2013).). It can obviously create the risk that the p2p platform may have no explicit interest in making sure that the loan is a decent one and the borrower is credible (Jenkins, 2013). There are examples of p2p platforms problems because of that. In Poland - is the collapse of Polish p2p lender Monetto.pl in January 2010. This platform was one of the early entrants to Polish social lending market. From the beginning, the main problem of Monetto.pl was the influx of unfair borrowers, which was partly caused by insufficient verification procedures (Polish P2P Lending Site Monetto, 2010). The other reason was that venture capital firm which backed by the platform but decided to pull out of the project at the end of 2008 (Polish Social-Lending Website, 2010).

Regulations are the important problem that arises from the development of peer-to-peer lending. There are world examples of it – for instance the actions taken lately in UK, which are similar to these taken in the US. They assume that starting from April 2014 the p2p lending will become a regulated activity overseen by the Financial Conduct

Atomic scale design of carbon nanotubes 17

Authority. The main aim of the regulation is to bring credibility and stability to the fast-growing industry and to protect the p2p users from losing their money, what can jeopardize the growth of p2p market (Hurley, 2012). There are plans to introduce regulations and maybe supervision for loan companies in Poland. There is however so far no information about any regulatory framework in the area of Polish p2p lending market. It seems that too much regulation of social lending could lead less attractive interest rates for p2p investors and borrowers. However, from the other hand making it “more safe” could result in its greater popularity and higher demand on such services.

5. Conclusions

P2p lending develops quickly in the world in recent years. It turns out that financial institutions aren't already essential for attractive investing or borrowing money. The main benefit of p2p financing is that lenders get quite high returns and borrowers - low-cost loans. The functioning of p2p lending platforms shows how complex, and because of that, challenging is the borrower-lender relationship. The p2p lending is however not free from important questions, which also concern the dangers connected with such financial services, for instance: information asymmetry and its consequence and general – the safety of the transactions. All the time it seems to be an open question concerning regulation of this type of financial services. Probably we may need a new paradigm of regulation and supervision corresponding to the conditions of virtual reality. First of all, regulation which will safeguard from different types of risks occurring in p2p lending, and secondly, regulation which will not hamper the innovative concepts in this area of financial transactions.

Zopa in the UK or Prosper in the US are only the two examples of the well functioning platforms, but p2p lending is also developing in Poland. Kokos.pl or Finansowo.pl – are the examples of web platforms offering such services, which gain more and more members. In addition, its users have willingly accepted the p2p loans. However, the Polish social lending market is still tiny comparing to the British or American ones. There is untapped potential in the Polish p2p lending market. There is a rising demand for alternative to banks sources of financing and new possibilities to invest funds. The main player is platform Kokos.pl, which is the first and the biggest social lending service in Poland. One of the strengths of this platform, apart from its innovativeness is the wide range of mechanisms used in verifying potential borrowers.

The future perspectives of Polish p2p lending seem to be very promising. However, it is hard to imagine that the p2p lending platforms could become the potential rivals of mainstream banking. The future depends on the situation of p2p platforms – among others: their security and transparency.

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