Financial technology, or FinTech, is a broad term encompassing any technology designed to facilitate financial services. Individuals and businesses are both benefiting from the emergence of these digital solutions. Examples include virtual currencies, robo-advisors and of course peer-to-peer lending (P2P).
While FinTech exists as an ecosystem of services and tools, peer-to-peer lending has become the hub of the wheel. Why? It represents all of the key features inherent to a FinTech solution. In this article we’ll look at these three aspects of P2P lending which illustrate its future as a leader in the fintech revolution.
Built For Speed
Amid the global financial crisis of 2008, many banks closed their doors. Customers found that loans were increasingly difficult to obtain. Banks, strapped financially, became more risk-averse as most mortgage-backed securities became toxic to balance sheets. P2P lending emerged from this disaster as a new way for borrowers to obtain financing. Additionally, investors lending money, discovered P2P lending could generate returns thereby boosting growth amid a then floundering stock market. Today, analysts forecast the P2P market will be worth $897 billion by 2024.
The modern roots of P2P mean that the infrastructure is wholly digital. This aspect enables marketplace lenders to adapt fast to market changes. Expansions can occur with speed. Borrowers in need of fast capital can get decisions swiftly. Some have reported that consumers require an average of 32 hours to complete the paperwork for a conventional bank loan. P2P platforms require only a fraction of this time. In many cases borrowers can receive funds on the same day. Moreover, this speed enables P2P providers to operate with lower costs.
A Cheaper Model
Technologically enabled speed drives down costs. “Platforms are also able to match borrowers and lenders (because they are not holding any of the loans themselves) without any interest margin,” explains the European Credit Research Institute. This aspect of the model means cheaper loans compared to banks.
Banks have built their infrastructure over decades. The results of this aged model are outdated technology and processes. Research determined that “banks planned to spend 77.6% of their 2012 technology budgets on maintenance.” These “legacy systems” are costing borrowers in the form of higher interest rates. Given that P2P firms are mostly digital, rather than physical, changes are swift and with reduced costs.
A Stronger Social Contract
For good reason consumers have become disillusioned with banks. Each year delivers a new group of headlines about unethical practices from even the largest institutions. One recent example comes from Wells Fargo. Finding from the U.S. Consumer Financial Protection Bureau resulted in fines for the bank totaling $185 million. Authorities alleged that the bank opened as many as “two million deposit and credit-card accounts without customers’ knowledge.” These practices have become all too common and customers have lost trust.
P2P lending enjoys a better reputation because investors understand that they’re funding individuals and not a bank’s balance sheet. This is a stronger social contract because you have a large group of people agreeing to engage in a practice that serves the common good. In many cases the group most concerned with social responsibility is millennials.
The millennial generation consists of a total $2.45 trillion in spending power. Why is this number important? Millennials will be judicious in their allocation of these funds given that “millennials are 66 percent more likely to engage with brands when issues of social responsibility are brought to the forefront,” according to research from Cone Communications published by The American Marketing Association. P2P lending engages with this sense of social responsibility.
The P2P world is just a piece of the fintech revolution. However, alone it represents the key characteristics of fintech’s spirit – it’s cheap, fast and acts to serve the greater good.