Peer-to-Peer (P2P) Lending Reinvents Banking
- May 8, 2016
- 2 min read
The global financial crisis paved the way for innovators. Heavy losses forced banks to scale back on riskier consumer and small business lending, as increased regulatory oversight and capital requirements made these loans less attractive to banks. Years of historically low interest rates, meanwhile, whetted investor appetite for alternative sources of yield.
Meanwhile, technology made it possible for P2P lending platforms to identify borrowers and make quick lending decisions. Where traditional lenders have to follow lists of requirements to approve applicants, peer-to-peer lenders are using algorithms to make snap decisions. One of the driving factors behind the growth of p2p lenders is better customer satisfaction due to speedy response times and funding.
Peer-to-Peer lenders enjoy all the advantages of the financial system, without its costs. They have no capital requirements and much lower operating expenses, which allows them to offer borrowers lower rates. Banks are keen to learn how P2P lenders are utilizing data more efficiently.
However, creating platforms that are as fast and nimble as the p2p lenders will take time. Banks excel at originating loans and underwriting credit but are slowed by the loan legacy systems, liquidity and capital rules. By far the biggest advantage for P2P lenders has been the lack of capital and liquidity requirements relative to the banks.
The challenge for banks is that they are trying to play both defense and offence at the same time. They are trying to defend existing market share, while figuring out how to stay relevant in a digital future. Some of the organisations are approaching the market by either funding P2P platforms or putting money behind start-ups, which is a way for them to get into the game.
We believe that banks are better off partnering than doing it themselves due to the speed by which things are changing.
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