The Challenges and Opportunities of Peer-to-peer Lending
As peer-to-peer lending grows in popularity and consumers increasingly have access to lenders outside of their local communities, what can community banks do to strengthen relationships and compete innovatively?
What is Peer-to-Peer (P2P) Lending?
Peer-to-peer lending, as it sounds, initially emerged to remove banks and other financial institutions from the borrowing and lending mix. Instead, fueled by technology and the digital environment, transactions could occur through individuals, investors and newly emerging businesses that have moved into this space. Lenders and borrowers are matched up through online platforms. Investopedia lists the six best peer-to-peer lending websites; they are:
- Upstart
- Funding Circle
- Prosper Marketplace – the first marketplace in the U.S.
- CircleBack Lending
- Peerform
- Lending Club
Before these options emerged in the marketplace, “banks owned the lending market,” says Mickey Goldwasser, VP of marketing with Payrailz, a digital payments company that offers advanced bill payment and money transfer solutions to banks and credit unions. “When you needed money, you went down to your local bank, filled out a loan application and they fulfilled that—they owned the market. There weren’t any other alternatives,” he says.
But something happened around 2008 that changed the lending landscape.
The Big Drivers of P2P Lending
In 2008, when the country went into a deep recession and many banks fell under scrutiny for their loan practices. “Banks and credit unions were really, really not in the business of wanting to lend,” says Goldwasser. “That created an opportunity where other people said, ‘well, people still need access to capital.’ That’s where there were groups willing to say, ‘we’ll take on the risks the banks don’t want to take on.’ In many ways that was the birth of peer-to-peer lending. The financial meltdown was really a time when banks ratcheted back, and they weren’t going to lend to just anybody. The introduced a lot of friction to the process, if you will.”
Today, not only are loans taking place without the need for a traditional bank, they’re also taking place without the need for a face-to-face interaction. The ability to use technology to expedite and simplify the lending process was another big driver shifting loans from banks to new sources of capital.
Why P2P Lending is Attractive to Consumers
“There are three major benefits of peer-to-peer lending that appeal to its growing market,” says Jennifer McDermott, a consumer advocate for finder.com, a personal finance comparison website. “The niche nature of the loans, a digitally-enabled application process and the speed in which these can be approved.”
Community banks, she says, “will have to either meet or counteract each of these benefits in order to win out with locals.” For instance, she says “there are countless alternative lenders that cater to very niche loan needs such as funding cannabis businesses or fertility treatments.” Community banks can have an advantage, says McDermott, because of their more in-depth understanding of the local community and its lending needs.
Not all business is necessarily equally at risk, of course.
(Prius) “In the community bank space, the consumer lending segment has been a rather small part of the community bank’s overall loan portfolio,” notes Prius. “Commercial real estate, home equity loans/lines and residential mortgages tend to be the predominant loan types,” he says. These loans require more time, effort and documentation. For mortgages, the process requires a lot of post-approval due diligence and simply may not be attractive to P2P lenders, at least not at this point.
Each community and each market will differ, of course. “Looking at areas such as community issues and the biggest economic opportunities for locals will help determine a niche community banks can carve out and own,” McDermott says.
How Community Banks Can Respond
It happened to Blockbuster. It happened to taxi cab companies. It happened to hotels. Now it’s happening to banks and other impacts are sure to follow. As shifts in traditional markets point to opportunities to fill a gap, make an improvement, or meet an unmet need and technology emerges to provide better service, better access—sometimes at a better cost—consumers will follow. These shifts represent risks to traditional providers. Blockbuster is just one example.
As peer-to-peer lending grows in popularity and consumers increasingly have access to lenders outside of their local communities, what can community banks do to strengthen relationships and compete innovatively?
What is Peer-to-Peer (P2P) Lending?
Peer-to-peer lending, as it sounds, initially emerged to remove banks and other financial institutions from the borrowing and lending mix. Instead, fueled by technology and the digital environment, transactions could occur through individuals, investors and newly emerging businesses that have moved into this space. Lenders and borrowers are matched up through online platforms.