To compete or cooperate? That is the question being asked in the boardroom of many banks on considering their P2P strategy. There’s no doubt the rapid growth of the P2P sector has taken the banks by surprise. With the advent of full regulation, and attractive incentives such as the IFISA, it would be remiss for banks to not want a slice of the action.
In a recent report published by PWC, they analysed how peer-to-peer lending platforms are transforming the consumer lending industry.
Peer-to-peer platforms are, as PWC puts it, “gaining momentum”. And, as they do so, are beginning to threaten the modern banking world, and the banks themselves. Peer-to-peer lending began in a similar way to other ideas; from a need shared by many and a desire to cut out the middle man – the middle man who made life difficult and often expensive. At the beginning, users lent and borrowed relatively small amounts, often for personal use or for launching small- to medium-sized businesses. Now, however, as the PWC report comments, this tool is expanding into “mortgage and other asset classes”. This is making the banks sit up and take notice; unsurprisingly. A new concept, new businesses developing the idea, and consumers looking for an alternative are creating a community and a way of working that is threatening the traditional banking system.
There are various elements that attract users to the P2P lending sphere: “The lower cost-structure associated with online originations creates the potential for P2P platforms to offer borrowers attractive rates.” Add to that the generally superior quality of service, both in terms of usability and customer service, and it’s not surprising that the banks are losing business.
The question that then arises is how are the banks reacting, and how will they continue to react? They essentially have two options: collaborate or compete. According to this recent report, PWC believes that banks can choose to collaborate, forming alliances and “white label” partnerships with some of these new P2P companies that involve co-branding and customer referral. Or, they can decide to interact as investors. This raises the question of whether these banks will have an advantage over individuals, through algorithms and dedicated teams working on the process, enabling them to catch opportunities before individuals; an issue P2P lending platforms may want to address before making any agreements.
This leads us onto another question: do the P2P lending companies want to collaborate with the banks? This is something that no doubt varies from company to company, and requires analysis, thought and a detailed decision-making process on their part.
The banks can also decide not to collaborate, of course, and opt to compete directly with P2P platforms, perhaps following their lead, learning from their popularity and success, and adopting some of the best practices these businesses have implemented. PWC takes a look at some of these in their report, suggesting that banks would need to adapt and evolve, learning from the emphasis on customer service and the technological features employed by P2P platforms. Such elements that the banks should take into account, according to PWC, include:
- Concise, straightforward application requirements, which allow borrowers to complete application forms in around 10 minutes.
- A shorter timeline, with loan approval issued quickly, and funding often taking less than a week to process.
- An online system, which enables users to complete the whole process virtually, without needing to visit a bank branch – something that most people would want to avoid at all costs!
- Real-time indicators, allowing users to always keep track of the status of their application and loan.
- An online community, which P2P platforms use to great effect in order to maintain an open dialogue with their customers, communicate with them, inform them, and receive feedback from them, so that they can improve the services they offer.
- Additional, alternative data, that can be used to add information to the traditional credit risk scores, and, as PWC comments, shows great promise in terms of credit decisions and analysis.
At WLCF, we’re ready to collaborate with traditional financial institutions. Those wanting to compete can leverage our technology to do so. Alternatively, for those wanting to collaborate, we have a strong awareness of the market and can help to consult on potential tie-ups.
Only time will tell what the future of the relationship between P2P platforms and banks holds. Whether banks learn from the popularity of this relatively new business model; whether they decide to compete directly or partner up; or whether customers decide they want to revert back to an in-person, in-branch experience, is something that we, and PWC, will have to wait and see.