For years, Peer-to-Peer (P2P) Finance has been encroaching on the territory of traditional financial service providers. Decentralised online platforms are used to enable swift and cheap capital investments and loans between ‘peers’, without the involvement of banks. Yet more and more major P2P operators are looking for partners. Is this good news for banks, or a Trojan horse? Whichever it is, the gates need to be thrown open.
P2P Finance is experiencing a major growth spurt and is rapidly maturing.
Menno van Leeuwen Head of the Innovation Centre Focus Team
Growth spurt in P2P Finance
It has become abundantly clear by now that Peer-to-Peer is more than just another hype. The decentralised computer networks where peers conduct transactions without the involvement of third parties have repeatedly proven their value as a business model. This is exemplified internationally by Über and Airbnb and in the Netherlands by Peerby. P2P Finance is also experiencing a major growth spurt and is rapidly maturing. Last year, the European market represented 3 billion euros, with a growth rate of 144%, and projections show that in 2015 peers will exchange around 7 billion euros.
Banks and P2P platforms: possibilities to complement each other
Sceptics might say that the success of P2P Finance is coming entirely out of the pocket of traditional lenders: the platforms are grabbing more and more of the financing pie. In fact, they are performing a service to banks too, by creating new opportunities for private individuals and small SMEs to raise capital. In recent years, using present risk analyses and financing processes, banks have found it difficult to provide capital to these segments.
At the same time, clients of P2P Finance platforms still depend on banks for other financial services. Moreover, where these platforms excel is in straightforward lending, where they use almost fully standardised processes and analyse credit applications using data models. The more complex the financing construction is and the more money is involved, the more human involvement and specific expertise is necessary. These are two elements for which the P2P Finance approach is not suited, or at least not at present, and that render banks indispensable.
Learning from P2P platforms: data-driven approach
P2P platforms in a wide range of sectors owe their success largely to their data-driven approach. P2P Finance also focuses closely on the power of large numbers. They use big data to review credit applications and apply complex models that become increasingly accurate as more and more data are added. In addition to the available financial and/or business data, they are starting to look at data from external digital sources, for example social media profiles and online publications. Moreover, the virtual elimination of human involvement means that the loans are available swiftly, sometimes even within a week.
So far, the chief strength of traditional lenders has been in analysing financing risks based on historic data. Annual results, market developments and face-to-face meetings help them to determine whether a client is eligible for a loan or capital investment. Owing in part to the rise of P2P Finance platforms, banks are now working hard to standardise and automate their processes and to implement a data-driven approach. ABN AMRO, for example, is developing an online loan application system that uses an automated process to speed up the procedure considerably.
Next step: partnerships, company-specific platforms and hybrid models
Not only are banks adopting the data-driven approach of Peer-to-Peer platforms for their own organisations, they are also cautiously beginning to form partnerships with them. Although P2P offers an alternative to some banking services, for more complex financing and related products the two sides complement each other very well.
Partnerships for the lead generation
In the United Kingdom last year, Santander Bank entered into a partnership with Funding Circle. They have developed a ‘lead generation’ model that offers mutual benefits. The bank refers SME clients looking for small amounts of financing to the platform, and in exchange Funding Circle advises clients to go to Santander for their day-to-day banking needs, cash management, advice on international banking and assistance during growth.
An own P2P Finance platform
ABN AMRO was one of the first banks in the Netherlands to embrace P2P Finance, and in 2013 launched its own crowdfunding platform. Although a number of impressive projects have been funded via SEEDS, the bank has decided not to scale up this initiative. Nevertheless, it yielded valuable experience and taught us some important lessons. We are using the findings to develop alternative roles for Peer-to-Peer Finance at the bank. For example, The Ocean Cleanup used the underlying crowdfunding technology and IT infrastructure of SEEDS in a successful (Dutch) bid to raise money for the pilot phase of its large-scale project to clean up the seas.
Hybrid model: co-financing
Services of Peer-to-Peer platforms and banks have the potential to complement each other, as is being demonstrated by Rabobank and Collin Crowdfunding. The parties have come to an arrangement and have created a hybrid form in which the bank provides a loan if a particular level of start-up capital is raised through the platform. At the same time, Collin does not pay out until the bank loan has been finalised. Rabobank predicts that in the future its role will become more that of a mediator between borrowers and people with savings.
This partnership is probably music to the ears of Topicus. Using Fundbook (Dutch), it hopes to shortly offer people the possibility of using crowdfunding to finance part of their mortgages. Consumers tell their stories on the social platform and specify how much interest they will pay and so seek to draw investors. Fundbook makes the initial financing possible, organises the process and the paperwork and supports the tradability of the mortgage investments. The effect is that risks are spread, it becomes easier for consumers to take out a mortgage and investors enjoy nice returns.
The future of P2P
So should banks focus all their efforts on hybrid models and partnerships for the lead generation or even take over P2P platforms? These are vastly important considerations and the answers are not immediately clear. Smart innovation is a matter of monitoring the developments closely, trying, testing, learning, adjusting and carrying on.
The Innovation Centre is currently researching a number of scenarios. Many of these will never see the light of day, yet they help us understand what the future holds. One thing is clear, though: that future will include P2P Finance. How the relationships will develop remains to be seen. The platforms are keeping us on our toes, though, and offer both sides opportunities for exciting new partnerships with added value for our clients. What more reason do we need to throw open the gates?