How P2P lending platforms are transforming the consumer lending industry by PwC

Is P2P lending a threat or an opportunity? The PwC report examines how peer-to-peer lending platforms are transforming the consumer lending industry and how traditional banks fit in this picture. We made a short summary of the report.

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A paradigm shift
Peer-to-peer (P2P) or marketplace lending is shaped by technological breakthroughs and demographical shifts. As developed countries experience an aging population, consumers are increasingly looking for investment products that generate higher returns than traditional savings accounts offered by banks. At the same time millennials are becoming a larger portion of the consumer loan market as they seek credit to finance major purchases or refinance their student debt. Consumers are hungry for a simplified, streamlined lending process and peer-to-peer is filling that sweet spot.

A disruptive force
While traditional banks lend their own funds, marketplace lending platforms act as a matchmaker between borrowers who are seeking a loan and investors who are looking to invest. This P2P lending model is growing in popularity with borrowers because of its perceived low interest rates, simplified application process and quick lending decisions.

Growth potential
US peer-to-peer lending platforms’ origination volumes have grown an average of 84% per quarter since 2007. Projections for the longer-term growth of the P2P market vary considerably – with one venture capitalist projecting volume as high as $1 trillion by 2025 and the PwC analysis indicates that the market could reach higher than $150 billion by the year 2025.

Options for banks: collaborate or compete?
Financial institutions have multiple approaches to respond to the potential disruption of P2P lending. Some have already begun to make strategic decisions. PwC has outlined four possible approaches for financial institutions:

  • 1. Collaborate as an investor by purchasing loans
  • 2. Form a “white label” partnership to co-brand products
  • 3. Compete directly by developing its own P2P platform and compete with existing platforms
  • 4. Compete indirectly by learning from peer-to-peer lending platforms

Simplified customer experience
One of the biggest differentiators for P2P platforms is the online interface and the customers experience the platform enables. The lending process is simplified and streamlined – as all of the process is done online, borrowers can log on to get real-time updates throughout the approval and funding process. A customer experience tailored for today’s tech-savvy customers and omni-channel environment is an essential ingredient to stay competitive.

Bright future ahead
P2P platforms have an opportunity to transition from “niche offering” to “major player” in consumer lending and compete directly for borrowers across the full range of products, credit tiers and markets.

Will banks and other traditional financial institutions choose to compete or collaborate with P2P lending platforms?
“It is highly likely that more banks will collaborate with different P2P lending platforms as retail banking activities are scaled down and more focus put on commercial banking. Retail lending (incl. SME lending) is often very costly due to large number of transactions and low transaction values when the lender is not automated and streamlined to provide these services. Therefore more banks will look at different partnerships in order to still access and finance retail credit without the hassle of originating and servicing these loans,” says Pärtel Tomberg, CEO of Bondora.

What is your prediction?