Is there a role for banks in P2P lending?
Interest rates on UK savings accounts have been waning for a long time. This has spurred conversations on whether savings accounts are actually dead. Some eager savers have turned to alternatives outside of their own banks, such as P2P lending platforms, in search for greater returns. This bestowed trust in alternative lending has resulted in growth in the P2P lending market.
Though there is risk in the investment aspect of P2P lending, there can be notable gains in taking out a loan from a P2P platform over a bank. So, how do banks fit into this new market?
The P2P lending market
Last week the Peer 2 Peer Finance Association (P2PFA) announced that almost £6.5 billion had been lent through P2P platforms by the end of Q3 this year. There has been a steady increase in the number of individual borrowers and lenders in the market. The three biggest platforms – Zopa, Funding Circle and RateSetter – are responsible for roughly 72% of the total lending.
Source: Peer 2 Peer Finance Association
Looking outside of the UK, challengers in the lending space are getting recognition. A KPMG and H2 Ventures collaboration, Fintech 100 is a report created to celebrate those who are fundamentally changing financial services: 50 established providers and 50 emerging stars.
Within the category of established providers, 20 have “lending” as their specialisation. Among these were P2P lenders from France (Lendix), Australia (SocietyOne), and USA (Lending Club and Prosper).
This influx of non-bank lending alternatives presents a challenge for banks, who can’t compete with the low interest rates of market challengers.
Traditional loan vs P2P loan – an illustrated example
An example that Mapa’s analysts came across recently involved a Barclays account holder looking for a loan to pay off a credit card debt. Although the account holder has been a customer with the bank for more than 8 years, the APR given in a quote within the mobile app was 20.9% – comparable with that of a credit card.
The same person later received a quote from P2P lender, RateSetter. The APR was less than 5%. When presented with the question ‘Would you rather pay £708.08 or £167.72 for your loan?’, then the answer is easy. For borrowers, there are notable benefits in choosing to take out a loan from a P2P lender, over a bank.
For people investing in P2P platforms, there are risks, but the proposition offers an alternative to keeping funds in low-interest savings accounts.
’Banks’ focus is on keeping depositors’ money safe, and they are regulated with this in mind,” says John Battersby, Director of Communications and Policy at RateSetter. ‘However, this comes at the expense of returns – as can be seen from the interest rates currently on offer. Peer-to-peer lenders like RateSetter are providing investors with direct access to returns from the asset class of loans, and are not seeking to provide a promise of safety.’
While banks might not be able to directly compete with P2P lenders, many are exploring other options.
‘Some P2P platforms have received increasing investment from institutions, including banks, who are attracted to this growing asset class. RateSetter has chosen to focus squarely on individual investors and our model is built around that,’ says Battersby.
New strategies and partnerships
We’ve written previously about partnerships between challenger banks and incumbents. Our analysts at Mapa are seeing a similar movement in the lending space.
Santander and Funding Circle partnered up in 2014 to refer declined business loan applicants from the bank to the P2P lending provider. The bank also announced a partnership with Kabbage earlier this year, an American FinTech provider that aims to speed up lending decisions.
Last year, Metro Bank and Zopa declared a different type of partnership. Metro Bank became the first British bank to lend its funds through a P2P lender – benefitting from the same interest rates as individual investors, of up to 5%. This was an interesting strategic decision taken by the bank to widen its lending reach beyond the UK, though the partnership has raised concerns over crowding out individual investors.
Is there a role for banks in P2P lending?
Ross Gallagher, senior analyst at Mapa comments: ‘With the Bank of England base rate of interest at a historic low following the August cut, it comes as little surprise that long-suffering savers are turning to FinTech providers to get more from their money. While savers have long complained that monetary policy is determined in the interest of borrowers, the irony is that regulation around capitalisation ratios and ring-fencing means that such disincentives to save actually seriously restrict the ability of retail banks to lend.’
‘P2P lenders offer a compelling proposition for savers who are currently earning barely enough with the traditional providers to cover the cost of inflation. P2P providers offer savers a comparatively high rate of return to invest their savings to provide lending to a diversified pool of borrowers. With much simpler business models and lower costs than retail banks, P2P providers can also offer borrowers very competitive rates and maintain profitability.’
‘With FinTech providers unburdened by the legacy issues that have restricted the responsiveness of traditional players, they can deliver dynamic propositions that respond to diverse customer needs. By cherry-picking a particular financial product or service, FinTech providers can also focus all of their efforts on developing compelling and engaging propositions across a single area of focus, rather than across a full suite of banking products. P2P lenders are developing agile, customer-friendly platforms that are redesigning the way consumers think about both savings and personal loans.’
While challengers are disrupting the P2P lending market, they are forcing an inherently slow-moving industry to pick up the pace of development. UK banks are looking to define their role in this space. Testing out new partnerships and strategies will help shape the lending market as a whole – and, in the end, benefit the consumer.