ITS 6012 | Case Submission

Faircent - P2P Lending

by

Siddharth Kashyap - 22F253

1) Is P2P lending a winner takes all market ? Justify.

The P2P lending market is still in its early stages of development, and it is not yet clear
whether it will be a winner-takes-all market. There are a number of factors that could
contribute to a winner-takes-all market in P2P lending, including:

• Network effects: As the number of borrowers and lenders on a P2P lending platform
increases, the value of the platform increases for both borrowers and lenders. This is
because borrowers have a larger pool of lenders to choose from, and lenders have a
larger pool of borrowers to lend to.

• Economies of scale: P2P lending platforms that are able to attract a large number of
borrowers and lenders can achieve economies of scale in areas such as marketing,
technology, and risk management. This can give these platforms a cost advantage
over smaller platforms.

• Brand recognition: P2P lending platforms that have been in the market for a longer
period of time and have a strong brand name may be more attractive to borrowers
and lenders than newer platforms.

However, there are also a number of factors that could prevent a winner-takes-all market in
P2P lending, including:

• Differentiation: P2P lending platforms can differentiate themselves from each other
by offering different products and services, such as different types of loans, different
interest rates, and different borrower and lender protections.

• Regulation: Regulatory changes could make it more difficult for P2P lending
platforms to operate, which could lead to a more fragmented market.

• Technological innovation: Technological innovation could lead to the development of

new P2P lending platforms that are more efficient and more user-friendly than
existing platforms. This could make it more difficult for incumbent P2P lending
platforms to maintain their market share.

Overall, it is too early to say whether the P2P lending market will be a winner-takes-all
market.

2) Should Faircent race to onboard borrowers and lenders to its platform?

There are a number of factors to consider, including:

• The competitive landscape: The P2P lending market is growing rapidly, and there are
a number of other platforms that are vying for borrowers and lenders. If Faircent
does not race to onboard borrowers and lenders, it may lose market share to its
competitors.
 • The need to achieve critical mass: In order to be successful, P2P lending platforms
need to achieve critical mass. This means having a large enough number of
borrowers and lenders so that there is always a sufficient pool of capital available to
meet the demand for loans. If Faircent does not race to onboard borrowers and
lenders, it may not be able to achieve critical mass and may struggle to be profitable.

• The need to build trust: P2P lending is a relatively new and untested industry. There
is still some level of uncertainty and risk associated with it, and borrowers and
lenders may be hesitant to use P2P lending platforms if they do not have a strong
track record. If Faircent does not race to onboard borrowers and lenders, it may not
be able to build trust and may have difficulty attracting borrowers and lenders.

On the other hand, there are also a number of risks associated with racing to onboard
borrowers and lenders, including:

• The risk of fraud: P2P lending is a relatively new industry, and there is still a risk of
fraud. If Faircent does not carefully screen borrowers and lenders, it may be exposed
to fraud.

• The risk of defaults: Borrowers may default on their loans, which could result in
losses for lenders. If Faircent does not carefully assess the creditworthiness of
borrowers, it may be exposed to defaults.

• The risk of reputational damage: If Faircent does not manage its borrowers and
lenders properly, it could suffer reputational damage. This could make it difficult for
Faircent to attract borrowers and lenders in the future.

In my opinion, Faircent should carefully consider the competitive landscape, the need to
achieve critical mass, the need to build trust, and the risks associated with racing to onboard
borrowers and lenders before making a decision. If Faircent decides to race to onboard
borrowers and lenders, it needs to carefully screen borrowers and lenders and manage them
properly in order to mitigate the risks of fraud, defaults, and reputational damage.

3) What are the envelopment risks faced by Faircent?

Envelopment risk is the risk that a platform will be acquired or marginalized by a larger, more
established player. This is a common risk for startups in the digital age, as large incumbents
with deep pockets and established brands can often outcompete newer entrants.
Faircent faces a number of envelopment risks, including:

• Competition from traditional financial institutions: Traditional financial institutions,

such as banks and non-banking financial companies (NBFCs), are increasingly offering
P2P lending services. These institutions have a number of advantages over P2P
lending platforms, such as access to capital, regulatory compliance expertise, and
customer trust.
 • Competition from new entrants: The P2P lending market is still in its early stages,
and there are a number of new entrants entering the market. These entrants are
often well-funded and have strong teams.

• Regulatory risk: The P2P lending industry is still relatively new, and there is a risk of
new regulations being introduced that could make it more difficult for P2P lending
platforms to operate. This could make it more difficult for Faircent to compete with
traditional financial institutions and new entrants.

To mitigate these envelopment risks, Faircent needs to focus on building a strong brand,
developing innovative products and services, and maintaining a high level of customer
satisfaction. Faircent also needs to stay up-to-date on regulatory developments and ensure
that it is compliant with all applicable regulations.

Here are some specific actions that Faircent can take to mitigate envelopment risks:

• Focus on building a strong brand: Faircent needs to invest in marketing and branding
to build a strong brand that is synonymous with trust and reliability. This will help
Faircent to attract borrowers and lenders, and to differentiate itself from its
competitors.

• Develop innovative products and services: Faircent needs to continue to develop

innovative products and services that meet the needs of borrowers and lenders. This
will help Faircent to stay ahead of the competition and to attract new customers.

• Maintain a high level of customer satisfaction: Faircent needs to focus on providing

a high level of customer service to its borrowers and lenders. This will help Faircent
to build loyalty and to encourage borrowers and lenders to continue using its
platform.

• Stay up-to-date on regulatory developments: Faircent needs to stay up-to-date on

regulatory developments and ensure that it is compliant with all applicable
regulations. This will help Faircent to avoid costly fines and penalties, and to protect
its reputation.

By taking these actions, Faircent can mitigate envelopment risks and position itself for long-
term success.

4) What are the implications of overcrowding on one side of the platform?

Overcrowding on one side of a platform can have a number of implications, including:

• Increased competition: When there are more borrowers or lenders on one side of a
platform, the competition for loans or investments increases. This can lead to higher
interest rates or lower returns for borrowers or lenders.
 • Lower liquidity: When there are more borrowers or lenders on one side of a
platform, the liquidity of the market decreases. This means that it can be more
difficult to find borrowers or lenders who are willing to transact at a given price.

• Increased risk: When there are more borrowers or lenders on one side of a platform,
the risk of defaults or losses increases. This is because there is a greater chance that
borrowers will not be able to repay their loans or that lenders will not be able to find
borrowers who are willing to pay the desired interest rate.

• Reduced efficiency: Overcrowding on one side of a platform can lead to reduced

efficiency. This is because it can be more difficult to match borrowers and lenders,
and it can take longer to complete transactions.

To mitigate the implications of overcrowding on one side of a platform, platform operators

can take a number of steps, including:

• Limiting the number of borrowers or lenders on one side of the platform: This can
help to reduce competition and increase liquidity.

• Implementing pricing mechanisms that discourage overcrowding: This can help to

ensure that borrowers and lenders are willing to transact at a wider range of prices.

• Developing risk mitigation strategies: This can help to protect platform operators
and users from the risks associated with overcrowding.

• Investing in technology that can improve efficiency: This can help to speed up
transactions and reduce the amount of time that borrowers and lenders have to wait
to complete a transaction.