One of the main reasons for the growing popularity of P2P lending in developed economies has been the rate of returns that investors have been earning. Here is a comparison of the rate of returns from the two major economies, UK and USA, which shows why P2P is gaining such popularity.

UK

In the UK, the top deposit rate for 6 months tenure is around 1.1% while that for a 2 year period is 1.6%. For 6 month fixed rate bonds, the returns are around 0.9-1.1%, while the same for a 2 year period is around 1.35-1.6%.

The asset class performance in UK in 2013 for the various assets were as follows: Shares - annual return of 18.23%, housing - 6.9%, bonds had a negative yield of -8.6% while gold too had negative yield of -27.14%.

In comparison, among the top P2P lenders in UK, Zopa under its safeguard option offers a return of 3.2%, Ratesetter offers around 3.84%, Ratesetter offers around 4.8-5.2%, rebuildingsociety.com offer a range of 9-9.95%.

USA

In the US, the current CD (Certificate of Deposit, similar to Fixed Deposits in India) rates in banks range from 0.1-1% APY (annual percentage Yields) for a 6 months tenure. A 2 year CD would give a maximum of 0.6-1.26% APY.

In terms of other investible assets, the average return for the period 2004-2013 on S&P500 has been 9.1%, 3 months Treasury Bills were 1.56%, while on 10 Year Treasury Bonds were 4.69%. The other lucrative options like real estate and other financial assets have taken a major beating post the financial crisis and have led to major asset loss for many investors.

In comparison, Lendingclub has a present range of 7.26-12.7% rate of return for loans of 6-12 months, with a median rate of return of 9.9%. Prosper on the other hand, gave returns in the range of 5.65-8.89% across the different risk based classified categories.

5%: The new benchmark

What is really driving the investment scenario in favour of P2P lending is the steady decline of average investment yield across the most conventional investment instruments. Conventionally, institutional investors like pension funds had 8% rate of return assumption as a base rate. However, the present global scenario has forced a rethink. According to the OECD, the weighted average real net investment return of pension funds which manage combined assets of over $32 trillion was 4.4 percent in 2012, and just 0.2 percent in the year before. US public pension funds,

who increased the share of equities in their portfolios to try and get the maximum returns, managed an average quarterly return of 3.45 percent in the first nine months of 2013. However, given the high risks associated with equities, there is the threat of corpus erosion and in consistency of returns.

In this context, the 5% benchmark of returns is a more realistic assumption. The ability of P2P platforms to provide yields at par or even above the best of the conventional investment instruments is the prime driving force for the industry today. Despite obvious dangers of default, the track records of such portals are surprisingly consistent. Lendingclub has an annual rate of default of only 3% while that for Prosper was 8.6%.

The advent of P2P has revolutionized the investment market for small and medium level investors in the West. The success story seems poised to be replicated now in India as well, with pioneers like Faircent offering similar services.