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The Challenges and Opportunities of Peer-to-peer Lending

by on June 27, 2019

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:

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.

P2P lending has not yet reached the point where it threatens
large, secured consumer and business loans. But the future potential exists,
and the wake-up call has been made.

What can community banks to do address the potential impact
on a core part of their business?

Thinking About Doing Things Differently

Organizations and individuals tend to take the path of least
resistance until some outside force causes the to rethink the way they do
things and ask new questions about how those things might be done better. Loans
are a great example.

While community banks operate under a set of rules that P2P
lenders don’t (at least not yet), there are still opportunities to rethink the
processes behind making loans to identify ways to simplify and shorten the
process in ways that appeal to consumers and, increasingly, to business owners.

The P2P lending concept worked. It started with consumers
loans. But now we’re seeing it kind of morph into business loans,” says
Goldwasser. “The investors and borrowers are meeting on that same website where
someone is looking to lend money, and someone is looking to borrow money.” 

Community banks need to pay attention, Goldwasser says.
“When Uber first started, I’m sure the taxi cab companies were like ‘this is
nothing.’ But it’s had a dramatic effect. In no way am I saying this is going
to replace banks, but banks will have to be aware because it’s a competitive
challenge.”

A good starting point for community banks, says Goldwasser,
is taking a hard look at ways they might remove friction from the lending
process. That may involve asking some questions that may be easy to ask, but tougher
to answer, starting with: “Why do we do this, this way?” In some cases, it may
be because of a regulation; in others, it may be simply based on some outmoded
past practice that nobody has thought to challenge.

Now’s the time to challenge.

But, on a more positive note, community banks also have an
opportunity to leverage some benefits that are unique to them.

If You Can’t Beat Them, Join Them

Joel
Pruis is senior director with Cornerstone Advisors, specializing in
commercial and small business lending. Opportunities may exist, says
Pruis, for community banks “in the transition of these P2P lenders from direct
lending sources to actual online application platforms that can be white
labeled for use by the community banks.” In addition, he says: “Other
opportunities lie in the ability of the community banks to actually directly
invest or purchase loans form these P2P lenders.”

In some cases, community banks are finding opportunities to
partner with P2P lenders, says Pruis. “In 2015 Lending Club partnered with
BancAlliance which is a national consortium of 200 community banks to offer
co-branded personal loans,” says Pruis. “Some of the larger banks have
partnered up with OnDeck (Chase) and others.  Typically, the partnership
is based upon referring loan applications that might not meet the credit
criteria of the bank.  In some situations, the banks are actually using
the P2P lender platform to process loan applications.”

Leveraging Community Relationships

“To combat the uptick in peer-to-peer lending, community
banks need to return to their roots,” says Donovan Sipho, with Paraclete, Inc.
“The reason why I and others have used community banks is because of the values
that they stand for, as opposed to the corporate giant banks,” he says. Sipho,
who is a marketing consultant, notes that peer-to-peer lending is standing up
to the conventional banking system and suggests that community banks can do the
same. He recommends that community banks:

  • Highlight what they do for, and within, the
    communities they serve
  • Involve the community in the bank, creating
    opportunity for the community to invest in the bank, as they invest in the
    community
  • Give people a bank they can trust and believe
    in—a bank that is truly making a difference

Certainly, there will be—there is—some segment of the population comfortable with borrowing money in cyberspace from people and organizations they don’t even know. But there will also continue to be some segment of the population that prefers to borrow money from people and organizations that are part of the fabric of their communities—whose employees are their friends, relatives and neighbors; who they see participating in community events; providing support for local people and the local economy; and understanding, in a way that technology still can’t, what it means to be a community.

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