By David Swanson, Head of Lending, ArchOver
Traditional lenders such as high street banks are seeing parts of their business model change following the rise of alternative finance. As well as shaking up the finance space, alternative finance companies like peer-to-peer (P2P) lenders and fintechs are also injecting a growing consumer trust into the financial industry – which has long struggled to prove its trustworthiness to customers. Our research found that over a third (36%) of UK investors have a deep distrust in the financial sector, and are generally unsure who to trust with their money – or where to invest it.
As P2P matures, it must maintain its leadership on consumer trust, increasing lender confidence and delivering attractive returns. The growing sector doesn’t have the scale or the intention to pose a major risk to the big players, but a shake-up of the ways people access finance can only be a good thing for a financial industry that has remained largely unchanged for the past 400 years.
While too radical a change in too short a time leads to the type of risk that threatens us all, the P2P sector’s considered approach thus far and its core tenets of lender control and transparency are inspiring trust in users. And trust, as we know, is fast becoming the currency of the future.
Looking ahead boldly
This is just the start for P2P. As it matures, it will be in a great position to work in tandem with the banks to expand their services. There is still an obvious space in the investment market for P2P to fill. On top of that, P2P platforms attract borrowers with a vastly different profile to the banks, meaning P2P will remain outside of the banking fold, complementing the existing financial landscape rather than melting into it.
Banks are not the only source of significant cash. There are many past innovations that are now commonplace. Company treasures, family offices, funds, pension funds, individuals and charities are all investment vehicles that have, at one point or another, stirred things up. When we consider them today, however, we do not view them as grave threats, but rather as necessary options that have helped us to grow the size of the pie overall.
Technology has played a major part in this – and in increasing consumer trust in finance. Over a third (37%) of those we surveyed would hand over trust to technology when they need financial direction. This has opened up a huge market for fintechs and financial robo-advice services in a marketplace in search of trustworthy financial advice.
Working with, not against, the big banks
On the other hand, until significant scale is achieved in P2P lending, with further products on offer for borrowers and a deeper sense of opportunity for lenders, the banking system is unlikely to invest seriously in the sector. In the US, which is a few years ahead of the UK in respect of funding, P2P has already begun to form a part of the smaller banks’ strategies – which suggests the course the UK market will take.
In this scenario, P2P will remain a bothersome, if small, source of competition rather than a partner asset. That competition will help keep the banks honest: that’s a large part of the true value of P2P.
With all this in mind, the question of whether banks and P2P platforms should collaborate or compete is an important one. For the time being, the fact that P2P and the banks do things very differently is leading to more value being created for both. Co-existence is working well in place of symbiosis.
Pushing P2P forward
One of the greatest strengths of P2P is that its business model is based on lenders’ own balance sheet and not that of the P2P company, or any other institution. It is therefore in P2P’s best interest to work at maintaining and growing trust among lenders and borrowers. Competition is always healthy but if it gets in the way of stability and thorough processes, both lenders and borrowers will be negatively impacted.
There will always be pain points when looking at P2P as a possible source of funding. This is a necessary price for the benefits of alternative finance, but more than this, they are also the trademark of a sector that is truly democratising access to finance.
The biggest challenge faced by borrowers is one of trust. A large portion of the businesses that seek P2P funding are owner-managed businesses in which there is a direct relationship between the performance of the businesses and the financial wellbeing of its owners. For a P2P lender to raise funds for that business takes time and effort, as well as a thorough view of their track record and shared values in terms of trust and honesty.
Personalisation is taking over the modern world, from retail to manufacturing, and this is plain to see in the world of finance too. A personal touch is an obvious tenet of peer-to-peer – the clue is in the name. But in order to deliver the best returns for investors, who distrust the system based on experience, and support businesses seeking funding to grow, treating businesses as individuals is crucial. For too long the finance industry has been simply a numbers game – alternative finance, and particularly P2P, is changing this for good. It’s time to focus on the people behind the numbers.
Simply put, there can be no shortcuts on the road to building trust. In the long-run, taking the time out to focus on building trust will not only strengthen a business – no matter the industry – but also provide security to the lender. This combination keeps P2P, and the financial industry as a whole, the honest and trustworthy service it should be. In turn, this brings stability – a decade after the crash, could anything else be a better sign of a brighter future?