There’s little doubt that after the recession of 2008, peer-to-peer lender platforms were seen by the people whom newly risk-averse banks had closed their doors to – predominantly individuals and SMEs - as solutions to their borrowing needs. As p2p lending grew in popularity, the banks started to become concerned: these platforms used cutting-edge technology to deliver fast and transparent products and services to their customers. But is the relationship between banks and p2p platforms today still a zero sum game? Are banks threatened at the prospect of losing business to peer-to-peer lenders?
The answer to each of these questions might once have been “Yes.” However, the lending landscape is changing. The previous rivalry-based relationship is morphing into one of symbiosis. Competition, of course, is still present, but the banks seem to have shed their earlier sense of threat in relation to the alternative finance sector.
Banks have realised that they’ve got an almost impossible struggle on their hands to compete with the alternative finance sector’s technology; changing their vastly expensive legacy IT systems to such agile and continually evolving Fintech-style alternatives isn’t an economically viable option presently. But if peer-to-peer lenders can provide borrowing to people and firms whom the banks reject, banks can still retain some of their SME and consumer relationships through the payment systems that they control.
We live in an era in which the amount of actual cash in circulation has largely disappeared. The banking sector’s electronic payment systems are more crucial than ever to keep the whole economic machine well-oiled and ticking over nicely.
The catastrophic error that banks made was to use the fractional reserve system (in which only a fraction of bank deposits are backed by real cash-on-hand and are available for withdrawal) in absurdly risky ways. They took new high-risk to recklessly high levels. Peer-to-peer lenders have been taking that high-risk lending but without attempting leveraging, leaving the banks able to go on improving the money supply in less dangerous areas such as personal loans and mortgages.
In other words, banks are increasingly seeing p2p lenders as supplementary rather than adversarially subtractive. Peer-to-peer lenders aren’t aiming to replace the banks; instead, they’re deleveraging them.
An example of a pioneering peer-to-peer lender platform is Unbolted, which specialises in providing borrowing to individuals and SMEs who may temporarily be cash-poor but asset-rich. Most p2p lenders try to minimise risk by requiring borrowers to be impeccably creditworthy. That, of course, involves credit checks, which always leave a footprint and can actually damage an applicant’s credit rating. Unbolted dispenses with these intrusions entirely. It effectively reduces risk by collateralising a valuable asset owned by the latter as security for the loan. It won’t lend against property, but will uniquely lend against a plethora of other high-value possessions, from gold and silver to luxury handbags, classic cars, musical instruments, jewellery, fine wines, fine art and rare manuscripts.
The platform partners with experts in each of the asset fields, who determine the value of the possession on a secondary market before providing the loan, which typically matures after six months. Borrowers can repay early without penalty; if they can’t settle, the asset will be sold at auction in line with the estimate previously obtained.
