Whether peer-to-peer lending is set to disrupt the banks or whether they will just be another customer acquisition channel for the banks is a hotly debated topic. The truth of the matter is that the assumptions underlying this debate are misplaced.   
 
Peer-to-peer (P2P) lending integrates two separate digital models - customer acquisition and capital distribution. Therefore, it is inevitable that peer to peer lenders will disintermediate banks in some markets. In others, they will only disintermediate offline customer acquisition channels such as broker networks and replace them with a digital customer acquisition channel.

But where peer-to-peer lenders really stand out is in providing financial access to customer segments that are under-served or not served at all by incumbent financial institutions. Customer segments such as prime residential mortgages that are well served by the banks have not seen the entrance of any peer-to-peer players.

Most P2P lenders in the United States and in the United Kingdom have made their mark serving segments that banks have not been keen to serve or serve poorly. Examples include providing unsecured credit to non-prime individuals, business loans to small or medium sized enterprises, development finance to small developers, invoice financing for small businesses or in the case of Unbolted, releasing liquidity against assets for consumers and businesses.  There are a number of reasons why peer-to-peer lenders can profitably serve customer segments that banks are not keen to.


1. Without the burden of legacy systems and processes, transaction costs are significantly lower for new players. This allows them to profitably serve small loans. A new player such as Unbolted would run their entire process, from id verification to the signing of a credit agreement to disbursal and distribution of the loan to its peer-to-peer lenders, without any human intervention. The marginal cost of serving a loan is very low and therefore new players do not need to discriminate against small loans.

2. The ability to seamlessly distribute the loan to lenders on the platform allows peer-to-peer lenders to enter a new product segment easily without requiring them to commit loss absorbing capital. It reduces the cost of failure and the risk associated with trying something new.

3. With a digital distribution and fulfilment model and without inflated brand marketing costs, the customer acquisition and retention costs of a peer-to-peer lender are often significantly lower than an established bank for non-prime customers.

4. Last but not least, the new platforms do not have comfortable and safe income streams from prime customer segments to protect, like the banks do. Especially in the United Kingdom, the banks have thrived in an oligopolistic market with little competition. In a capital constrained environment, they have little incentive to venture into novel territory.

Peer-to-peer lending has a strong positive impact on financial access and fosters economic inclusion of the customer segments that they serve, such as non-prime consumers and small business owners.

Peer-to-peer lenders have significantly lowered the cost of borrowing for consumers and businesses that previously either had no access to debt or had to borrow from opportunistic lenders charging punitive rates. For example, a loan from Unbolted costs less than half that of a loan from incumbent lenders in personal and business asset financing. The new players have also vastly improved access for their customers, with easy to use online applications and transparent processes, removing the requirement and fees of various brokers and eradicating problems of geographical reach.


Existing and new peer to peer players are continually looking at innovative ways to allow financially under-served segments to access cost-effective finance. In some cases, they will be supported by bank balance sheets and in some others they will disrupt banks, but the fundamental theme of the sector is to provide financing to under-served customers.  

 

Founders Blog
Dec 10, 2015
Rito Haldar rito@unbolted.com