As Bill Gates once astutely noted, banking is a necessity but banks aren’t. The growth of peer-to-peer (P2P) lending is a notable example of how traditional banking can be rapidly turned on its head.
Though P2P lending currently holds just a small share of the market, P2P lending is a fast-growing sector in markets such as Australia and Singapore. The disruptive impact of fintech providers, especially in the P2P lending sector, is becoming more pronounced.
Given this, how is P2P lending going to change traditional banking and how might it already be disrupting the way consumers and businesses access debtor finance?
The lender-borrower relationship
P2P lending removes the financial institution as a direct intermediary. Unlike in traditional retail banking, P2P platforms are not lenders themselves; instead, they provide a loan matching service by connecting prospective borrowers with investors or lenders who provide the cash.
Borrowers can be consumers or small businesses, and typically the lenders rely on the P2P platform to assess prospective borrowers.
However, depending on the lending platform, investors or lenders might be able to select their preferred borrowers and/or opt into automated loan selection according to the investor’s predefined criteria.
P2P lenders generate revenue from origination fees charged to borrowers and service fees charged to investors. Since P2P lenders and platforms have no need to commit to expensive physical branches or invest in large teams of staff, the P2P lending model can offer cost efficiencies for both investors and borrowers.
This can take the form of lower fees, higher returns, and cheaper interest rates.
Credit assessment
P2P lending platforms are already driving changes in the way credit assessments are processed. P2P companies typically develop proprietary application-processing systems to assess prospective borrowers in a highly individualised way, by drawing upon hundreds or even thousands of metrics.
The process by which this happens can be largely automated and rely on big data and AI tools. Apart from big data and analytics, some P2P lenders adopt an unconventional approach to risk management and applicant assessment.
For example, some lenders consider over-reliance on credit scores as looking back to the past and take the view that an assessment of the borrower’s personal qualities — a manual process carried out by a staff member — to be more accurate.
Given the fact established P2P lenders have successfully kept their percentage of bad debts very low, investors can have a degree of confidence in recouping their investment as long as they invest via a reputable P2P-lending platform.
Increasing borrower accessibility
In addition, P2P lending is potentially expanding available credit to broader types of borrowers. These could be borrowers who might have otherwise been turned away by traditional lenders and their more bureaucratic approaches to credit assessment – with the Australian banks’ reluctance to lend to small businesses a prime example.
With big data increasingly empowering P2P platforms to review applicants based on highly personalised metrics, creditworthy borrowers who don’t fit the potentially narrower criteria of traditional lenders might be able to access loans more easily.
The Singaporean government recognises the importance of giving consumers more choice. It recently opened up its banking sector to allow digital and non-bank players to compete directly with traditional lenders.
Providing new investor opportunities
The disruptive scope of P2P lending isn’t confined to access for borrowers; it also encompasses investment opportunities, another central pillar of traditional banking. As well as offering proprietary borrower assessment systems, P2P lenders also provide investors with new opportunities for obtaining strong investment returns.
This could be especially attractive for lenders or investors given the extremely low-interest-rate environment. P2P platforms typically have a process for qualifying investors in compliance with local credit laws and consumer regulations.
These investors could be everyday consumers (retail investors) or wholesale clients (corporate or institutional investors). Investors have the option to choose the best options and highest returns by shopping around for P2P platforms and P2P-lending products.
Also read: The case for alternative lending
As such, P2P lending has provided more choice for investors, and Singapore is recognised as a leading hub in Asia for P2P lending; whilst Australian investors are seeking better returns.
Looking to the future
P2P lending is already starting to change banking, and this trend is likely to continue in countries such as Australia and Singapore.
While P2P lenders currently make up just a fraction of the retail lending market, they have the potential to gain market share rapidly by solving the pain point associated with a lack of access to finance for some consumers and small to medium-sized businesses.
Despite P2P lending’s disruptive impact, banks could end up responding positively by becoming institutional investors in these platforms or even by acquiring them.
In the future, the P2P model might be adopted by the insurance sector and current players could expand their offerings to mortgage products, student loans, and other long-term products.
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