P2P lenders are setting new standards in finance and banks have much to learn

By David Pope on 14th August 2015

David Pope of Jumio discusses how P2P lenders embrace new technology and risk to offer a new way of lending

P2P lenders are setting new standards in finance and banks have much to learn

In the last 10 years, real lending alternatives to banks have not only emerged, they have thrived and become embedded in our financial landscape.

Previously, “alternative finance” was seen as a second-class citizen. However, in the words of a University of Cambridge study into its remarkable growth “(it) is revolutionising banking, investing and giving by using technology to simplify the links between those who want to invest money and those who need it[1].” Alternative finance is now viewed by stakeholders and experts as meaning innovative challenger companies taking on distrusted and unpopular banks and embracing new technologies to offer funds to individuals and businesses.

One of the fastest growing alternative finance models is peer-to-peer lending, which makes up 84.06% of the total UK alternative finance market[2]. Year-to-date figures from AltFi Data show £1,486,503,596 has been lent in 2015 via peer-to-peer lending in the UK, representing an annualised growth of 108.47%[3]

It’s a market that is booming and growing at a remarkable rate. It has taken advantage of the banking crisis and has successfully taken on the might of traditional banks at a time when they were vulnerable.

The question, then, is “what is driving this?”

My experience in working with peer-to-peer lenders such as Landbay suggests that it is because they are prepared to take risks and make the process fit for digital commerce. At a time when banks are more cautious than ever, alternative finance providers are prepared to take the risks banks are unwilling to. And they are using technology to make the previously clunky and laborious process of securing finance simpler and swifter.

The Landbay example is indicative of why P2P lending is enjoying such growth. Landbay is a P2P lender specialising in buy-to-let (BTL) mortgages. In 2008, BTL mortgages made up almost 20% of total mortgages in the UK. However, the banking crisis of 2007-2008 had a huge impact on the BTL market and, although the market is starting to pick up again, it is still nowhere near this 2008 figure[4].

As the financial crisis was rooted in the selling and securitisation of sub-prime mortgages, it is understandable that banks might be more risk adverse when lending on property. However, just because banks are more nervous about certain markets than before, it doesn’t mean that the market demand has gone.

History tells us that where there is a gap in the market from traditional lenders, other lenders will be ready to fill it. So if banks are less willing to provide financial products to support the BTL market, then others will step in.

In February 2015, Landbay was the fastest growing P2P platform in the UK[5] after being in business for less than a year.

It isn’t just that P2P lenders seem prepared to take higher risks, it is that, so far, these risks seem to have paid off.

Of course, this has to be put into the context that P2P is still a new industry, but, to date, there have been no major crises in P2P lending. The P2P lending market has had no Lehman Brothers or Northern Rock. The critical element of trust still remains within the P2P market.

This willingness to lend by P2P lenders is not only demonstrated in their appetite for risk, but in how simple they make it for lenders and borrowers to access their services.  

The online environment of P2P lending means that lender and borrower authentication is even more critical than for traditional high street banks. Not only do money laundering regulations have to be met, as with traditional banks, participants in P2P lending need to conduct enhanced due diligence.

P2P lenders are embracing new technology, such as online ID document authentication, to allow swift application and swift decision making while still remaining compliant with Know-Your-Customer regulations. They are delivering services to their customers in the way that their customers want. Put simply, it is customer led, something that traditional banking sometimes fails to be. 

For example, Jumio, has been able to provide Landbay with cutting edge computer vision technology that can authenticate customer ID documents during online registration. Not only did it speed up registration time by a factor of five, it has also helped Landbay comply with Know Your Customer requirements and made the process even more secure.

So this winning combination of being willing to take risks when lending and being able to offer a process optimised for the digital economy is giving them the competitive edge.

The only question that remains is where this leaves banks.

Currently, there seems to be a rush among banks to invest in P2P lenders. RBS, Santander, Goldman Sachs and Socéité Générale are just some of the leading banks who are investing in and backing P2P lenders[6].

Indeed, Goldman Sachs, often considered a bastion of banking for the elite, has now begun its own consumer lending platform, demonstrating the strength of this market.

P2P platform investment by traditional banks is a smart move. If they can’t or are unwilling to copy the P2P model then they can still make money, for now, by investing in P2P platforms.

Yet it doesn’t mean that banks still can’t learn from some of the P2P platform business models. The technology used by P2P platforms to speed up registration and decision making can be adopted by banks.

Banks should look at how P2P platforms are exploiting new technologies to break down barriers to commerce and are engaging with customers. It’s a key reason for the popularity of P2P finance and could be a key reason in banks keeping pace.

 

Comments

Andrew Newman Head of Stategy & Development QTX Systems www.qtxsystems.com

03 Sep 2015 02:10pm

The advent and development of the market lending space is arguably the most important market structure change in the post financial crisis eco-system. Market lending has enabled borrowers to meaningfully lower their cost of unsecured credit. It has also allowed lenders, punished by years of ultra-low interest rates, to access more attractive lending rates. Over the coming years, due to advances in cloud based technology and data aggregation, it is likely that a wide variety of market niches will develop in the space. The benefit will be greater access to credit for both individuals and small business with the greatest beneficiaries being those who have traditionally been shunned by banks. Additionally, market lending serves a purpose of reducing risk in the banking system through disintermediation and simplified operational models. In the next phase of development, as institutional investors gear up to enter the space, there will be more securitizations and leverage introduced to the space. There will be attempts to develop benchmark indices and derivative product. However, as there are significant gaps in the front to back settlement process, reconciliation, prime record and operational risk management these types of innovations will be difficult to achieve until those gaps are corrected. There is an urgent need to drive a swift and robust convergence to the operational compliance standards that exist in the vast majority of fixed income markets. Putting this process in place will allow market lending to expand and to provide the necessary financial safeguards for all participants.

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Landbay
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