Retail banking has been one of the fastest and most prominent users of digital technology disruption, to ensure that they provide the best for the consumers as soon as possible while ensuring that the existing core banking infrastructure keeps pace with the changes. The traditional banks face a serious threat of becoming irrelevant at every stage of this massive disruption, given the emergence of the interestingly newer and preferable modes of accessing the banking related services.
At present, the peer-to-peer lending is becoming a force to reckon with. It is a is a method of debt financing, which enables people to lend and borrow money without involving any bank or financial institution as an intermediary.
For instance, just imagine that you are applying for a loan by feeding in some necessary information into an online portal, and in a matter of few hours getting the loan sanctioned. This has been made a reality by a lot of online lenders by setting up online platforms that connect the investors with the borrowers. The P2P lending is now becoming increasingly popular amongst the loan seekers because of the user friendly application process, lower rates of interest and a faster loan sanctioning process.
How does the P2P lending work?
The peer-to-peer business model is considerably different from that of the traditional banks. They act as a platform to connect the loan seekers with the investors. The peer-to-peer platforms do not grant their own funds, instead, they earn funds from origination fees that is charged to the borrowers and from a small portion of interest rate that is charged to the investors as service fees. The investors earn revenue from a portion of the interest rate that the loan seekers pay on their loan. The borrowers enjoy certain benefits such as easy application process, faster fund approval decisions and easy access to the status of their loan.
Most of the P2P platforms generally offer whole loan and partial loan purchases to retain the institutional and retail investors. Automated loan selection is offered, where the investors are allowed to set a predefined criteria for the loans they intend to purchase, the system then quickly filters out these loans for the respective investors. With various forms of peer-to-peer lending, the investors now have the option of fund specific types of loans.
Lending Club is currently one of the popular lending platforms in world. It offers loans for small and mid-sized enterprises over fixed term lengths of 48 or 60 months. The firm has grown at a rapid pace and it has around 45% of market share.
The peer-to-peer lending industry is now slowly seeing more number of regulatory Authorities globally. For example, in the UK the FCA (Financial Conduct Authority) has designed a framework to achieve certain objectives such as:
- Providing additional protection for all the customers
- Promoting healthy competition within the P2P industry
- Ensuring that the platforms provide correct information and have clearly defined procedures for handling funds from the clients
- Ensuring that the companies deal with customers appropriately during financial difficulties
Having a regulatory body will certainly help the consumers gain confidence in the system. With the active involvement of regulatory bodies, the lenders and borrowers will be able to make informed financial decisions.
One of the most noteworthy disruptive forces in the present world is the disintermediation and the growing popularity of the sharing economy. In the finance sector, this is playing out as the peer-to-peer financial products, where the intermediaries are being removed. A lot of fintech firms that operate on a marketplace model usually do not hold risks on their financial statements. This indicates that they will need relatively small amounts of equity when compared to the banks, for meeting similar client expectations.
Why is P2P preferred?
The peer-to-peer lenders have some real good advantages when compared with the traditional lenders, here are some reasons as to why they are preferred.
- The P2P lenders have lower operating costs than banks due to the lack of physical infrastructure and the use of technology to drive process efficiency
- In this platform, the lenders get a higher net yield than what they can currently earn from banks
- No Capital requirement, as they usually do not hold any sort of residual interests that they originate
- It has a much simpler and an efficient application process when compared to the traditional financial institutions. The entire process takes place online with minimal human interaction and the decisioning on the credit approval is made in a few minutes
How can banks stay relevant in the future?
The fact that banks need to compete well in order to hold on to their payments revenue base is a given. But, fintech will open up a wide host of possibilities if banks are able to get it right. To start off with, mobile devices will increase the number of interactions the customers have with banks, allowing banks to clearly understand their needs. By offering some interesting payment services such as mobile wallets and P2P transfers, banks will gain higher chances of tapping new higher-growth opportunities through increased transactions, in the form of fees charged. Creating customized payment solutions will allow banks to reach out to a lot of people who do not have a bank account. These could be the mobile money or even transfer services. In the meanwhile, the banks must also aim to properly understand their customers’ behavior online and offer some value added services in order to meet specific needs across the banking sector.
Here are some things that banks can do to stay relevant in future:
Banks will have to create some highly competitive online payment offerings, in case they wish to win against the non banking players. These offerings must be a part of their digital strategy, with an intention to create a multi-channel banking experience. In order to compete with the non banks, the banks must build strong relationships with the customers, enhance security and tap on to it’s multi-channel capabilities.
Create a fantastic customer experience
Banks must focus on eliminating the existing process silos and create a unified view of all the customer activities spread across various channels. Banks must come into a realization that their success in this battle will completely depend on their ability to meet the seamless and enhanced user experience offered by their non banking competitors.
Building on the core competencies
In a digital payment sector, banks will have to embrace a startup kind of an approach to understand their customers better. They will have to build some compelling customer experiences and offer value added services. Doing so will not only help them in retaining their existing customers, but will also help in getting new customers.
Banks must consider observing and learning from these emerging non banking competitors. P2P platform’s effective use of technologies and their constant focus on customer experiences are the areas where banks will have to focus on and improve in order to remain competitive.
HashedIn has helped a couple of promising firms in India by building a lending platform to give the users a completely hassle-free experience on loan requesting process. Kindly let us know if you have any specific problem / use case, where we can provide more information or consult you.