Peer-to-Peer lending – how should banks respond?
Peer-to-peer lending is a great example of a technology-driven innovation. The market, is about linking savers to would-be borrowers, only exists today with any scale because of technology. At its most basic it’s a financial version of matchmaking, with cash-rich participants seeking partners with the desire to borrow and a risk profile that the lender is happy to accept.
A recent article in The Economist, with the excellent title ‘From the people for the people‘, reviews the P2P market and it’s progress so far. As it points out it’s a market that has benefited from the economic crisis of recent years, with banks reluctant to lend and cash-rich investors struggling to find adequate returns.
The P2P market is gaining size – the top 5 platforms (including The Lending Club, the largest, pictured above) are generating about $10bn a year in loans, and the sector is doubling the amount loaned every 9 months. That’s still small compared to the global lending market, but the growth is impressive and seems likely to continue for the foreseeable future.
If you can’t beat them, join them?
The question is – how should banks respond? Most platforms and marketplaces are run by technology companies, but in a recent survey of 11,000 consumers by Cognizant, around three-quarters of respondents said they would put more trust in a marketplace run or backed by a bank.
Banks are responding to this opportunity – some, like Westpac in Australia and Barclays Africa – have launched their own marketplaces. This may be one way, at least, of countering the threat.
Fight fire with fire!
Alternatively, banks and finance companies need to keep and win customers through better service, lower costs and innovative products.
To achieve that, they need to fight fire with fire – adopt modern technology that allows them to engage with customers who are mobile, always online and highly tech savvy. Unlike many ageing core bank systems, an up-to-date lending system will allow banks to offer consumers and businesses fully mobile, online capabilities, rapid and easy applications, swift decisions and the sort of service they expect from their online retailers.
At Nucleus Software, we spend our lives focusing on how technology can drive better customer experience and improve the lending process. There are many exciting developments both available today and in the pipeline, which are set to transform the consumer experience – and help banks and finance companies to compete in an ever more complex market.