Peer-to-Peer Lending in the Slovak Republic

What is Peer-to-Peer Lending?

Peer-to-peer lending (“P2P lending”) can be defined as the lending of financial resources directly between individuals, facilitated by an intermediary and an online platform. This platform facilitates the exchange of financial resources between borrowers and investors. The very essence of P2P lending lies in the fact that users, thanks to the online platform, enter into transactions directly with one another. It is a form of lending between entities – regardless of their legal form – while excluding traditional credit institutions (most commonly banks). As a result, it is based on a peer-to-peer relationship, designed to provide benefits for both participating parties.

The Idea Behind P2P Lending. The concept of P2P lending originates from crowdfunding. Crowdfunding is a method of alternative and participatory financing of various initiatives (projects), primarily for individuals and start-up companies. It typically takes the form of online campaigns and, in practice, focuses on both non-profit and entrepreneurial activities. By its very nature, crowdfunding is based on raising funds from a large group of people (supporters). Each supporter contributes a relatively small amount toward the overall target amount that the project owner seeks to collect. Building on this concept, P2P lending creates a direct relationship between a borrower and multiple individuals – investors (creditors). Within the P2P lending model, three (3) distinct entities are involved:

1. The borrower,
2. The investor, and
3. The entity operating the online platform.

Since P2P lending is derived from crowdfunding, its essence lies in the idea of raising the required amount of funds by collecting small amounts from a large number of investors, as opposed to traditional lending, where the entire sum (in most cases) comes directly from a single investor (creditor). The best-known platform facilitating P2P loans in Slovakia is Žltý melón.

Advantages and disadvantages of P2P lending

Advantages of P2P lending:

• Better investment returns for investors, along with relatively low fees for borrowers;
• Ihe perception that P2P lending has greater social value than conventional banking;
• Improved access to loans for borrowers who do not meet the criteria set by legislation for granting loans;
• Technological innovations have the potential to enhance the quality and speed of services for both borrowers and lenders.

Disadvantages of P2P lending:

• Insufficient verification of borrower information;
• Inadequate assessment of the borrower’s creditworthiness;
• Different levels of legal regulation across individual states, creating cross-border barriers (for example, in some EU countries, consumer protection laws apply to P2P relationships)
• Lack of oversight by the National Bank of Slovakia in the Slovak conditions.

Does the use of P2P lending also involve risks?

In this context, the answer is yes. Nevertheless, the significance and use of P2P lending have been steadily increasing in recent years. Among the potential risks, the following should be mentioned:

1. Weaker consumer protection. It is essential to note that the provisions of the Civil Code govern the provision of funds through peer-to-peer lending. Since consumer protection laws do not regulate the relationship between borrowers and investors (lenders), the Civil Code itself provides clients with only minimal legal protection.
2. Low level of creditworthiness assessment of the borrower. Since P2P lending is primarily used by borrowers who have been rejected by a bank, it can be stated that lenders themselves also assume a certain level of risk when providing funds, especially in cases where it turns out that borrowers will not be able to fulfill their obligations properly. The risk for lenders (investors) is particularly evident in the fact that, in P2P lending, there is no deposit protection. For this reason, it is much more challenging to attract investors than borrowers to P2P lending platforms. These risks for lenders (investors) are at least partially offset by the higher rate of return on the funds lent.
3. Exemption from the supervision of the National Bank of Slovakia. Since P2P lending, as one form of collective investment, does not fall under the supervision of the National Bank of Slovakia, it also brings certain risks. As the National Bank of Slovakia itself stated in its notice, participation in this form of lending through an online auction (platform) is carried out at the sole responsibility of the parties involved, up . For this reason, all participants are advised to carefully consider the potential risks associated with participating in online auctions, such as peer-to-peer lending.

What contractual relationships arise in the process of granting loans under P2P lending?

When loans are provided through peer-to-peer (P2P) lending, several contractual relationships arise, which differ primarily in terms of the parties entering into the contract. Specifically, the following contractual relationships can be identified:

Framework Cooperation Agreement. When entering into a framework agreement, the parties are verified to determine their status as borrower and investor. By its nature, this is a contract to which the provisions of the Civil Code on unnamed (innominate) contracts may be applied. It should also be noted that the framework agreement is subject to the provisions of the Civil Code on consumer contracts, since, by its nature, it is a contract – regardless of legal form – concluded between a supplier and a consumer, where the supplier is the platform operator and the borrower or investor is the consumer. The framework agreement is concluded between:

1.1 the platform operator and the investor. The subject of this framework agreement is not only the use of the services of the online platform through which funds are provided, but also the regulation of the rights and obligations of the investor in relation to the company operating the online platform.

1.2 the platform operator and the borrower. This agreement grants the borrower the right to participate in the loan auction, which in practice means placing the borrower’s loan request on the online platform. The company ensures the management of the borrower’s account as well as the collection of funds for the investor. By entering into this agreement, the borrower agrees that the identity of the investor will not be disclosed to them and that the company operating the platform will act in the name and on behalf of the investor within the framework of the loan agreement. The borrower also agrees that all funds provided are not owned by the company but by individual investors.

Loan Agreement. A loan agreement can only be concluded once the cooperation agreement has been signed and the verification of the contractual parties has been successfully completed. The loan agreement is concluded between the borrower and the investor, and its conclusion is also governed by the provisions of the Civil Code. Given the specific nature of providing loans through P2P lending, such a loan agreement is unique in terms of the number of contractual parties, since on the creditor’s side (as a contractual party) there are multiple investors, represented by the company operating the online lending platform, acting in their name and on their behalf. As with the framework agreement, investors appear in the loan agreement only under the username they use on the P2P platform, with their true identity remaining unknown to the borrower. By its nature, this loan agreement is an onerous contract that includes interest. The interest rate is always determined by the company operating the online platform, calculated as a weighted average of the interest rates offered by the investors.

Why is P2P lending excluded from the scope of supervision by the National Bank of Slovakia?

As mentioned above, the loan agreement concluded between the borrower and the investors does not meet the legal characteristics of a consumer contract. This is because neither the borrower nor the lender acts as a supplier (a person who, when concluding and performing a consumer contract, acts within the scope of their business or other entrepreneurial activity). Therefore, in this case, it is not possible to apply the provisions of the Civil Code regarding consumer contracts to a loan agreement. If, within P2P lending, the provision of financial resources occurs between natural persons – non-entrepreneurs, such provision of funds is excluded from the supervision of the National Bank of Slovakia.

On the other hand, if the investor in the contractual relationship acts as an entrepreneur and provides loans as part of their business activity, it would be necessary to obtain authorization from the National Bank of Slovakia to perform such activity. In that case, the lender (investor) would fall under the supervised entities in the financial market, subject to oversight by the National Bank of Slovakia.

It is important to note, however, that the current legislation does not regulate this issue in any way. Even if a specific entity provided loans as part of its business activity, the provisions of Act No. 129/2010 Coll. on Consumer Credits and Other Credits and Loans to Consumers and on Amendments and Supplements to Certain Acts could apply.

What happens if the operator of the online platform encounters difficulties?

In principle, yes. When concluding a framework agreement between the platform operator and the investor, the company operating the online platform:

1. ensures the declaration of the loan’s maturity based on the investor’s decision;
2. ensures the collection of wage deductions from the borrower’s employer;
3. is responsible for the management and monitoring of loan repayments from individual borrowers;
4. ensures the enforcement of the investor’s claim.

In the case of a framework agreement concluded between the platform operator and the borrower, the contract most commonly stipulates, as means of security, a promissory note and an agreement on the issuance of a blank promissory note, or alternatively, an agreement on wage deductions.

What if the internet platform operator gets into trouble?

It is important to consider the scenario in which the operator of the online platform decides to cease its activities, for example, due to excessive administrative burden. In the case of P2P lending, since borrowers do not know the identity of the investors, it may happen in practice that a single investor participates in financing a large number of loans. This can result in significant administrative complications concerning already concluded contracts, as well as in real difficulties in the potential enforcement of claims by the operator of the online platform.

The second case concerns a situation where the operator of a trading platform encounters financial difficulties. In general, companies engaged in financial technologies (such as P2P lending) may not, under national legislation, be required to meet the conditions for a recovery and resolution plan. In practice, only a few of them are members of any form of customer protection scheme in the event of failure. However, online platforms that facilitate contact between lenders and borrowers may establish their own protection or guarantee funds, the disbursement of which is not regulated by law. In cases where debt recovery becomes necessary, the online platforms mediating the relationship between the lender and the borrower provide the necessary assistance (if the lender decides to pursue recovery independently, the online platform provides all the necessary data). This situation causes many practical difficulties and opens the door for reflection on how this issue could be effectively resolved.

Does P2P lending affect the future of the banking sector?

Not only P2P lending but also many other financial technologies (such as crowdfunding) have fundamentally influenced the understanding of traditional banking intermediation. This is mainly due to their growing popularity. These new business models aim to improve not only the speed but also the quality of the provided services. The rise in popularity and the increasing use of new financial technologies and innovations represent competition for the current banking sector. Therefore, it can be concluded that as P2P lending becomes more popular, not only will our perception of financial intermediation change, but we should also consider how this trend will transform the nature of banks in the future. The emergence of new online platforms may pose a real threat to established banks operating in the financial market.

P2P lending, as a method of providing financial resources, functions as a form of financial intermediation without the use of a banking license. Unlike regulated deposit-taking institutions (such as banks), online platforms do not create assets or perform risk and asset transformation and are therefore directly dependent on investors. Global practice shows that an increasing number of new business models, including P2P lending, have taken a significant market share away from traditional banks, and credit institutions are now facing growing competitive pressure. For this reason, it can be expected that a similar trend will also affect Slovakia.

Conclusion

The aim of this article was to draw attention mainly to the nature of P2P lending and its practical application. It should be noted that its presence and growing use reflect the need to respond adequately to all changes occurring in the financial market—especially in the area of consumer protection and financial market supervision. Despite the potential advantages of this financial model, it is important to also consider the possible risks and issues related to its oversight. If we wish to avoid potential problems in the future, we should begin to reflect on how to adapt legislation and supervision so that they adequately respond to the new challenges and opportunities that P2P lending brings to the financial world.

References

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