How does P2P lending affect banking?
Global trends suggest: P2P lending is getting closer to traditional banking in terms of volumes. The capitalization of banking (€ 7 trillion in the 2nd quarter of 2019) is still many times greater, but the sector is slow, which becomes one of the key factors stimulating the growth of its alternative counterpart. This makes banking be more attentive to the success of P2P lenders.
Traditional banking: the time to change
Since the emergence in 2005, P2P lending services quickly occupied their niche. In 2014, the volume of the global P2P market was estimated at $9 bln. Since then it has been growing annually by more than 50%. By 2024, it is expected to reach $0.9 tn. Meanwhile, the capitalization of world banking was ranging from $7 to 8 tn over the past 3–4 years. On the one hand, this demonstrates the relative stability of the sector. On the other hand, this may be “a standstill” before a possible reversal of the trend line. Given the active development of alternative lending, there will hardly be a rapid rise.
After the global financial crisis, banking requirements for borrowers still remain quite strict. In P2P lending, they are milder. At the same time, the development of the P2P segment is stimulated by reduced costs for maintaining offices, IT advantages, the tools ensuring investment security (insurance, reserve funds and buyback guarantee) and, certainly, attractive rates for both parties. In addition, in some regions, P2P is one of the few affordable financial solutions for the lower-income due to the limited number of specialized commercial institutions.
The rapid growth of the P2P sector stimulates the improvement of the services. In the near future P2P lending will be possible without collecting documents due to the availability of the user data on the Internet (passport data, information on purchases made, loans taken, etc.). Services such as Google can share them with platforms upon agreement with customers for their convenience and time saving. Perhaps this will even help predict the course of events and the probability of default of an individual customer. The introduction costs of such innovations will be decreasing.
To avoid capital outflows and keep up with challenges, banks have to accelerate the development of the IT space, and even buy startup technologies, including those from the P2P segment. The slowest ones will probably have to pay for their conservatism. According to experts, a third of banking branches in Western Europe will close by 2023, and every 10th European bank will consider the possibility of sales or merging with a competitor.
Using fintech for full financial inclusion
Certainly, physical offices of banks and other financial organizations will not disappear completely. The “human factor” will still be a priority for consumers who are not confident in their knowledge of finance, or who deal with complex financial products that are easier to understand with the help of consultants. Finally, many customers still consider it more reliable to do transactions with large amounts at the bank’s cash desk.
Yet, traditional banking is still increasingly moving towards online space. In order to feel comfortable here, banks sometimes have to “catch up” with the P2P segment in terms of scoring, process automation, etc.
Certainly, there is no talk about the true competition between these sectors. Obviously, different audiences and product specifics will make traditional and alternative lending complement each other. It is also obvious that on a global scale, the P2P market is on a completely different stage of maturity compared to banking. It is mostly developed in Europe and the United States. In some regions, the development of P2P lending platforms is quite challenging, which contributes to the preservation of the traditional banking system.
An example of ambiguous conditions for the development of P2P lending in an economically progressive country is Japan. On the one hand, since 2016, there have been negative interest rates, which reduce the profitability of basic banking operations, and investors take the opportunity to use P2P to compensate for losses. On the other hand, one should take into account the widespread use of technologies by Japanese banks. The most ambitious players are accelerating their work in financial technology and increasingly mastering the digital space. If this trend continues, which is highly probable in a technologically advanced state, the need for P2P lending in the country may decrease to a minimum.
The development rates of a particular type of lending in the world will depend not only on customer demand. The final decision is made by the state in the form of regulatory measures and legislation. Borrowers are equally interested in convenient and affordable service both from banks and from innovative lending platforms.
At the same time, neither sector has yet fully satisfied the need for new products. For example, for centralized funding of entrepreneurs from around the world, given the local legislation and stricter regulation for cross-border capital flows. This is one of the most complicated but promising financial business tasks. Whoever solves it first, will have a chance to significantly improve the position.
According to experts of Robo.cash, the active development of the global P2P segment may slow down. This is due to attempts of governments to take restraining measures, because of the risk to oversaturate the economy with a credit load. Besides, such products as mortgage, car loans and deposits are still a prerogative of banks. Nevertheless, P2P lending will remain a very important part of financial systems, at least due to unique operation principles, such as advanced IT-architecture or security guarantees. The high demand among customers underserved by banks will remain the main driver of its development.
The era of traditional lending will continue. But at the same time, banking will have to be more attentive to the alternative segment. Using fintech, both sectors will continue their development to ensure the maximum financial inclusion on a global scale.