As far as millions of consumers and businesses are concerned, peer-to-peer (P2P) has transformed the way we share our assets and changed consumer behaviour in travel and ecommerce.
But what are the wider implications — for the banking sector, the UK economy and society in general — of the expansion of P2P lending and other disruptive forms of finance?
Well for a start, it is clear that we have only just begun. To take one example, the UK personal loans market alone is worth about £25 billion a year in new originations. The business lending market is even larger at around £87bn a year, partly due to the many different niches within business lending such as property development.
The sector is growing at an impressive rate in the UK. New figures from the Peer-to-Peer Finance Association (P2PFA) show that more than £500 million in new P2P loans were provided in the second quarter of 2015. In the first six months of 2015, total lending has already exceeded last year’s level, but still only represents a small fraction of the addressable market.
This all means fintech companies still have plenty of market space and time to innovate, disrupt and continue to grow. Their reaction speed in delivering new products and improving their proposition through better technology means they can evolve faster, meeting the needs of their customers and delivering greater value and service than traditional financial institutions. In the next decade I wouldn’t be surprised to see fintech businesses like Zopa, or Lending Club in the US, taking up to a third of the personal loans market in their respective geographies.
By cutting overheads and providing a service that is quick, transparent and easy to use, borrowers and lenders end up getting a better deal and much better rates than from a traditional high street bank. As these services become more ubiquitous with consumers and businesses, the value and service they offer should continue to improve due to increased competition in the market.
Looking beyond P2P lending and given the launch over recent years of a number of innovative finance businesses — from money-transfer services such as WorldRemit and TransferWise to mobile-payment platforms like Droplet — there is a strong likelihood that the fintech sector will play an increasingly important role in the growth of economies and change the way we interact with money and each other. What these fintech companies have in common is the ability to use technology to connect their customers more efficiently and in effect act as “smaller middle men”
At the moment it is just not realistic to expect the major high-street banks to deliver these sorts of efficiencies as many institutions suffer from problems of too much scale or have issues like outdated IT legacy systems or even worse, out-dated business models. The ability and agility of such large organisations to innovate tends to be limited at the best of times. In the wake of the financial crisis, there have simply been too many fines and a wide array of other issues for them to worry about.
It can also be argued that, as far as P2P loans are concerned, the result is a more efficient allocation of capital. The big banks are yet to emerge from the shadow of the credit crisis and their lending decisions tend to reflect this as much as the creditworthiness of potential borrowers. If businesses in particular find it easier to get the finance they need to expand as a result of P2P, the wider economic benefits are likely to be significant. Supporting such business expansion can mean a direct increase in consumer spending and tax revenues to help boost the economy as well as better returns for lenders who either save for the long-term, be that their retirement or build up funds for a life changing events like buying a home or starting a family.
One further attraction of disruptive finance is the way it democratises and opens up what has traditionally been the opaque way in which banks take our deposits and use them to fund a host of other activities as customers have no visibility over what happens to their funds. In contrast the openness of P2P lenders offers more choice and control to individuals over the assets they lend for. Our internal research suggests that this “social” factor is highly valued by customers on both sides of the transaction and that contrasts with the decline in trust suffered by mainstream banks over the past decade.
The next few years are likely to see further disruption in other areas, such as in the mortgage market. It is clear that the key to success in the fintech sector lies in keeping things simple. The big banks are failing to respond because they have become too complex. By focussing on specific niches and providing more streamlined and transparent services this new wave of innovators will change the face of finance forever.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.
