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P2P: An Informative Note

Dr. S. Shyam Prasad

B2B, B2C and C2C are terms commonly used and well understood. However, P2P term seems to be not all that well known even among the business school students. Further, some who were familiar with the term had only a partial comprehension of it. This note is intended to give a holistic perception about the term P2P or Peer–to–Peer term.

Peer-to-Peer or P2P stands for the transaction between to individuals or business directly or online without the involvement of a third party. This as the basis, P2P has different forms such as P2P Economy, P2P Service, P2P Virtual Currency, P2P Insurance and P2P Lending. In IT world, Peer-to-peer stands for a computing or networking distributed application architecture that partitions tasks or workloads among peers. However this note is restricted to discussing the former ones.

P2P Economy
In this model of economy, two individuals interact to buy or sell goods or services directly with each other. This transaction happens without the involvement of another individual or a company. In this model, the producer or the seller owns both the means of production and the finished goods. As the transaction happens only between buyer and seller without the involvement of any other party, there exists a greater risk for both the buyer and seller. The seller may fail to deliver the product or that the product may be of not the quality agreed upon and on the part of buyer, he may fail to make the payment. However, this increased risk is offset by the reduced transaction costs and lower prices.
Since in P2P economy the producers own both the means of production and the finished products this is similar to production economy of preindustrial age wherein everybody was a self-producer. This system was replaced by more efficient economic systems such as capitalism, central economy etc., that provided greater productivity and wealth. However, the advent of internet and IT have now made P2P economy a feasible system. This has also triggered investment in service providers who, while not directly involved in the production of P2P goods or services, act to make P2P transactions more visible, safer, and efficient.

P2P Service
Peer-to-Peer or P2P service is a platform which makes P2P economy to happen, i.e. it provides opportunity to interact directly with each other. In other words, the buyer and the seller transact directly with each other via P2Pservice. The majority of P2P services today are offered online.
Some popular examples of P2P services are:
  1. Open-source Software – anybody can view and/or modify code for the software
  2. BitTorrent – a popular anonymous file-sharing platform where uploaders and downloaders meet to swap media and software files.
  3. Air BnB – allows property owners to lease all or part of their property to short-term renters.
  4. Uber – a platform for car owners to offer livery service to people seeking a taxi ride
  5. Spotify – uses P2P networking to efficiently stream real-time audio content on-demand
  6. eBay – a marketplace for private sellers of goods to find interested buyers.
  7. Etsy – producers of crafts and other homespun goods can sell them directly to the public

(Courtesy: Investopedia)

P2P Virtual Currency
Peer-to-peer, or P2P, takes a decentralized approach to interactions between individuals and groups. This approach has been used in computers and networking (peer-to-peer file sharing), as well as with currency trading (virtual currencies). By virtual currency we mean the currency that is not traded physically. Virtual currencies are transferred between the concerned individuals electronically. One example of virtual currency is bitcoin.
A point of concern with P2P virtual currency is that as it is possible for individuals to transact without government interference and in complete isolation, it may allow anti-socials to launder money without detection.

P2P Insurance
The traditional insurance model collects a large number of strangers under a particular plan. An underwriter uses the profile information provided by each of these individuals to create a risk analysis of the individual. Information such as age, hobbies, and medical history are used to determine the premium that each policyholder would pay. The premium covers the cost of insuring the individual and provides assurance to the insured that in the event of a loss, s/he will be covered.
P2P insurance consists of a risk sharing network where a group of associated or like-minded individuals pool their premiums together to insure against a risk. Peer-to-Peer Insurance mitigates the conflict that inherently arises between a traditional insurer and a policyholder. The pool covers individuals with different risk profiles, with the low risk members paying less in premiums for the same type of coverage. In the event that one or more members or policyholders experience a catastrophic event, funds from the pool are used to cover the affected party(ies). The amount of excess in the pool at the end of the coverage period is retained by the insurance company as part of its revenue.
Insurtech, technology innovation in insurance, has introduced tools for policyholders to have easy access to insurance coverage at lower costs than traditional policies allow. The incorporation of fintech concepts like the crowdsourcing platform and social networking led to the Peer-to-Peer (P2P) Insurance movement.
The innovative nature of P2P insurance has presented some challenges for insurance regulators who consider the P2P model different from the traditional one. Similar concerns across regulatory bodies that are seeing technology disrupt the traditional norm in the financial industry have given rise to a new group of companies called Regtech. Regtech uses innovative technology to help companies and industries partaking in digital advancements efficiently comply with industry regulators.

P2P Lending
Peer-to-peer lending is a new method of debt financing that allows people to borrow and lend money without a financial institution. Taking advantage of technology and big data that is now available, P2P platforms connect borrowers to investors faster and cheaper than any bank. This concept of P2P lending is catching up fast as it offers less volatility and fixed higher income to the investors compared to the stock markets.
P2P lending is also known as “social lending” as well as “crowd lending”. Though in most cases the loans are unsecured personal loans, some businesses are also lent large amounts. In some cases, the loans are secured by collateral securities such as jewellery, vintage cars, buildings, aircraft for example.

Though Peer-to-Peer to interaction is nothing new, the term P2P has come to be used in recent times. Technological advancement has opened up newer avenues of P2P opportunities. Using P2P interactions have both advantages and disadvantages. One has to be discerning in choosing to adopt P2P approach.
A closing remark: P2P is also used to indicate Path to Profitability which is a clearly defined strategy to profitability in a business plan. This is completely different from Peer to Peer concept discussed above.

(This write up has drawn heavily on Investopedia and author acknowledges this fact)