Peer-to-peer lending (P2P) is a form of financial disintermediation in which online platforms bring surplus units (savers, investors, depositors) and deficit units (borrowers) together. Financial intermediation on the other hand is the business of traditional banks, acting as a ‘middleman’ in the transaction process. The future of P2P in relation to banks is going to be one of either competition or collaboration, P2P is an innovative idea using advancements in technology for a more efficient lending process. However both P2P and banks have separate competitive advantages and therefore I believe collaboration is a more likely scenario.
P2P platforms hold several competitive advantages over traditional banks. Due to their online nature, their application process is much faster, borrowers could receive funds in as short as 5 days from applying through a P2P platform. Moreover they have a huge cost advantage over banks, P2P firms do not operate through a network of branches like banks, they have far less employee’s as well as regulatory costs. The flexible nature and increased efficiency of the lending process allow P2P platforms to attract more customers through cheaper borrowing and greater returns for investors. So much so banks have started securitisation of P2P loans and have invested in P2P loans as institutional investment is beginning to overtake retail investment.
The key countries where P2P has grown rapidly is the USA, UK, China and Australia. The growth of P2P, particularly in the USA has been unquestionable, in 2014 the US P2P industry issued $5.5 billion worth of loans. Across all the previously mentioned nations, P2P lending has seen consistent and sustained quarter on quarter growth. Moreover demographics are a key headwind for P2P, According to Morgan Stanley 30% of millennials have used P2P and a further 18% are aware of the concept. Millennials are the most aware generation when it comes to P2P and a larger proportion of millennials are happy to use the new financial service, as generation z begins to enter adulthood, P2P lending will probably benefit.
Considering the rapid growth of the P2P industry you would think the industry would be seen as a potential threat and competitor to traditional banks market share. However this is not the case, at the moment P2P globally is a very small part of the financial world and looking ahead it is becoming more clear that collaboration between P2P firms and banks is a more likely scenario than competition. This is because banks also hold a competitive advantage over P2P lenders. Banks have an established presence, a large number of customers, with huge amounts of data stored on those customers. Furthermore it is important to point out, with the current economic context, P2P customers are ones that banks do not currently target. P2P borrowers are often SME’s or individuals with a new innovation or invention, banks, particularly during this period of increased regulatory scrutiny and capital requirements. Nevertheless, it is clear that both banks and P2P platforms hold a competitive advantage against one another, the added costs of fierce competition would not make economic sense compared to the opportunity of collaboration.
P2P lenders and banks have already started to work together. RBS and Santander have partnered with Funding Circle for example, while Zoopa is collaborating with Metrobank. There are several ways in which the two sides work together for mutual benefit, such as a white label partnership. In which when a customer at a bank do not meet specific lending requirements, the bank will direct them to their partnered P2P lender instead. Banks and P2P firms will be able to communicate smoothly and create new financial products for mutual benefit, the idea of P2P is certainly an innovative game changer in the business of matching lenders and borrowers. Technology has resulted in rapid change within the financial sector since the turn of the century, there is no reason why financial intermediation should be exempt from such changes.
At the moment, P2P lending is a small industry with a long way to go before it establishes itself as a form of lending to take seriously. However it has several tailwinds:
- Increased use of technology
- Demographics
- Attitudes towards banks
- Partnerships with banks
and albeit tailwinds:
- Inevitable increase in regulation
- Rising interest rates
Nevertheless the P2P lending industry will remain a player, whether banks decide to compete or collaborate is ultimately the decision of the players in the market. However collaboration appears to be the most likely situation.
thegaskellview 