SPECIAL FEATURE: Disruption in the lending space
Vinay Kare is lead business analyst at Happiest Minds Technologies
How long is something disruptive before it becomes the norm, or even mainstream? Initially targeting millennials, new lending models – disruptive lending, peer to peer lending, social lending – have taken a whole new approach to the age old loans market by directly connecting borrowers to lenders online.
Often providing more competitive rates than traditional banks, along with a streamlined application process and an improved customer experience, peer to peer lending is steadily growing in popularity for both borrowers and lenders alike.
And, faced with limited returns from traditional banks, savers now have an attractive new investment opportunity via these new online platforms that are increasingly disrupting traditional lending models.
Disruptive lending is here to stay
The low cost structure associated with peer to peer lending has enabled platforms to pass on benefits to both borrowers and investors. Perceived superior user experience has also led to analysts predicting a bright future for P2P lending platforms.
Although as a market P2P lending is still considered to be emerging, it’s reported that over $5.5bn in loans were issued by these platforms in 2014 in the United States alone.
According to Price Water House Coopers, the P2P market could reach $150 billion or higher by 2025. BI Intelligence forecasts that UK P2P lending will grow at a 45% five-year compound annual growth rate, reaching £16 billion ($23 billion) by 2020.
P2P platforms aim to provide risk-adjusted returns for investors which makes it only a matter of time before start-ups expand into a variety of asset classes including small business lending, student loans and mortgages.
Currently, most start-ups have only focused on a select few low risk or small ticket asset classes. Expansion into more asset classes will be a win – win – win for the platform, borrowers and investors.
Technology the key enabler for new market entrants
Technology has enabled disruption from innovative new start-ups in every facet of the lending cycle from onboarding a borrower, validating his or her identity, to automating debt collection activities. Specific products for each phase of the loan cycle are available that can then be further customised with little effort to tailor it to the business use case, providing a robust scalable platform that can support rapid innovation.
Marrying financial services to the various business verticals has never been easier and working with a third party provider that has both the technology and financial market understanding to help develop and enhance new market offerings will ensure new entrants keep one step ahead.
Over and above a great core platform, third party vendors have built solutions that readily integrate to a core platform enabling a whole host of automated functionality.
There are a plethora of services focusing on automating as many manual business processes as possible such as verifying identity, validating income, establishing a spending pattern, email scoring, social verification, generating a risk profile and credit scoring.
Traditional banks will soon be forced to respond
Constant disruption coupled with a high user uptake of these new offerings has pushed traditional banks to stand up and take notice. Today there are P2P lending platforms that promise loan disbursal in as little as six clicks.
It wasn’t that long ago that you had to visit a bank in person at least six times to complete the loan process. Tailor built services are also enabling the platforms to complete all the checks and balances, generate a scorecard and provide a decision without manual intervention in under ten minutes.
While the P2P lending market is still in its infancy, traditional banks will soon no longer be able to ignore this new market dynamic.
As consumers increasingly engage in P2P lending for perhaps a first loan and have a positive experience, platform lenders will inevitably widen their offerings to mortgages and other investment services.
The decision to turn to new lending models for other longer term lending needs will become easier.
Traditional financial institutions have a decision to make – will they choose to compete with P2P lending platforms or will they collaborate with these new entrants?
It’s an exciting time for FinTech, providing attractive new opportunities which will only widen as the market develops.