What are the implications of p2p lending for financial institutions?
Some new players have entered the financial services space, and they’re gaining ground. We’re talking about peer-to-peer (P2P) lending companies that facilitate the large-scale lending of money between people online.
At the most basic level, P2P lending is akin to one person with extra money to spare (an “investor”) lending money to someone who needs it (a “borrower”). Only instead of relying on the trust inherent in a friendship to ensure payback, a company secures the relationship between the two. This company makes sure borrowers have substantial credit for their loans, investors have money to lend, and the loans get repaid in a timely fashion.
Although FICO estimates that less than one percent of the U.S. population are using P2P services, the potential for the industry to make a bigger impact is exemplified by an impressive growth rate in a short period of time: P2P lenders issued $889 million in loans in 2012, $2.9 billion in 2013, and $6.6 billion in 2014. This year, P2P lending is expected to reach upwards of $32.8 billion.
What are the implications of P2P lending for financial institutions? Let’s take a look.
The main players
Two P2P lending companies making the biggest waves are Lending Club and Prosper Marketplace. Founded in 2007, Lending Club has leveraged a large third party investor network to issue over $9 billion in loans. Typical loans are between $1,000 and $35,000, with varying interest rates from 6.6 to 29 percent. Investors in Lending Club earn between 5 and 9 percent on average, depending on how much risk they accept.
Prosper Marketplace made news as the first American P2P lending company, launching in 2006. Since then, Prosper Marketplace has issued $3 billion in loans, in increments ranging from $2,000 to $35,000. The company’s interest rates are slightly higher than Lending Club, up to 35.9 percent, and investors typically earn the same amount as with Lending Club– between 5 and 9 percent, depending on risk.
Who are P2P borrowers?
Although consumer interest in P2P borrowing has increased from 8 percent in 2014, to 13 percent in 2015, research by FICO indicates that the industry still represents a small piece of the U.S. consumer credit market. Consumers with high-delinquency risk (those who have experienced bankruptcy, auto repossession, or foreclosure) are most likely to use P2P services. However, the market is not limited to the high credit risk segments. SMBs, entrepreneurs, and “workplaces of one” are also attracted to P2P services because they represent a less cumbersome way to get needed funding quickly.
P2P loans versus bank loans
As expected, the primary difference between P2P loans and bank loans is cost– P2P loans are generally cheaper to issue. Since they operate almost entirely via the internet, P2P companies have less overhead and lower expenses. Lending Memo gave the example of one large bank versus Prosper Loans. While the bank’s expenses include equipment and technology to staff 270,000 employees across 9,000 branches, Prosper Loans’ has to pay for only 240 employees across a handful of locations.
P2P companies court customers with benefits like lower interest rates, fixed rates, simple and fast applications, low late fees, and no prepayment penalties.
Opportunities for financial institutions
Since much of P2P business is for credit card or other loan financing, financial institutions have an opportunity to leverage their larger lending power and resources to claim a piece of the market P2P companies haven’t yet attracted. Some P2P lenders are taking the initiative by partnering with financial institutions in order to grow their scale and expose more customers to their business (Lending Club’s partnership with Citibank, for example).
Vantiv’s work with Oliver Wyman on the “The Future of Small Business Lending,” revealed that small businesses are attracted to alternative lenders like P2P companies because of their responsiveness, simplified documentation process, and streamlined user experience. These are all areas financial institutions can improve upon in order to attract borrowers who want their money fast and don’t want to deal with traditional banking bureaucracy and cumbersome digital processes.
By partnering with an experienced and trusted payments provider like Vantiv, financial institutions gain the technological and people innovations that allow them to be more agile and responsive in a dynamic and demanding marketplace. To find out more, contact us.