The lessons banking can learn from Fintech-rich P2P specialists
by Heat Recruitment
In 2005, Zopa, the first peer-to-peer (P2P) lending platform, was launched in the UK, swiftly followed by other providers such as Funding Circle and RateSetter. Only operating online, these sites act as alternative source of financing to banks, linking investors and borrowers directly.
The P2P platforms charge a fee or commission on transactions, rather than lending money themselves. Borrowers range from individuals requiring a loan to small businesses seeking investment to grow, and P2P platforms can offer funds much faster than a bank. Lenders are attracted by rates of interest of around 6%, much higher than those offered by banks.
The sector has expanded extremely rapidly and total lending grew 84% to £3.2bn in 2016. This rise has been fuelled by several factors. Post-2008, banks have been less willing to lend money, low interest rates have left investors looking for alternatives to traditional investments, and the growth of internet marketplaces such as Uber and Airbnb has made people more willing to accept new alternatives to traditional industries.
The traditional financial services sector is also experiencing high levels of consumer distrust, following the banking crisis, and P2P platforms are seen by many as offering a better customer experience. Research from innovation think-tank Nesta shows that 86% of existing P2P borrowers thought they would be ‘likely’ or ‘very likely’ to approach alternative finance platforms first in the future, even if a bank offered them similar terms.
So why is this?
P2P platforms differ from banks in the way they assess credit risk. Through the use of cutting-edge Fintech systems, and the ability to assess large volumes of data, P2P lenders can change their credit scoring algorithms daily – major banks typically do this only on a monthly or quarterly basis. The real key here is agility – whilst consumers need the service that banks offer, the way in which they do it is being superseded. P2P lenders, through fintech investment, are far more agile in their business operation, and are able to quickly respond to changing market conditions.
Despite the success of the P2P sector, many experts believe growth will slow and banks will reclaim market share. Research from Deloitte, for example, forecasts that P2P platforms will account for just £35.5bn, or 6% of total lending, by 2025. They believe that the higher rates involved in P2P borrowing will ensure that only a small minority choose to use it, despite the speed and convenience. The much larger size of banks ensures that they will continue to be able to offer better rates for borrowers and any rises in interest rates will play into their hands.
Today, many of the large high street banks have developed partnerships with P2P sites, taking advantage of this new way of working. This is either by directing customers to their P2P partners, or lending through the sites themselves. For example, Santander UK has partnered with Funding Circle to refer customers looking for loans who they are unable to help, while Metro bank has chosen to lend money through Zopa.
In response to this Fintech revolution, banks are beginning to upgrade their old IT systems and offer new services – replicating the benefits of the P2P model. The size and scale of major banks could allow them to undercut P2P platforms and win back business they previously lost.
Lord Adair Turner, former head of the FCA, is concerned that P2P sites are too willing to lend to borrowers with low credit scores, and that P2P could be the source of “big losses” over the next 5-10 years that would make “even the worst bankers look like absolute geniuses”.
The P2P sector obviously disagrees with this. Giles Andrews, head of Zopa, said he had “a rather different view of the future of financial services”. Andrews continued: “I think we will increasingly see consumers voting with their feet, or more likely their phones… they will look for products that are easy to understand, and [will look for] great technology solutions that make their life easier — I don’t think banks can begin to keep pace with that.”
Although the meteoric growth of the P2P sector is unlikely to continue at its present rate, this new fintech-based way of lending is with us to stay. Offering more options to lenders and borrowers can only be a good thing – particularly for businesses seeking increasing flexibility in the way their ventures are funded.
At Heat Recruitment, we’re experts in financial services – both new and traditional. Are you looking for your next role? Get in touch – you’ll be glad you did.
By Marcus Granville