» » » Is Peer to Peer Lending the future of banking? The Big Players Think So!

What do Larry Summers, John Mack and Vikram Pandit all have in common? Besides being among the world’s leading financial luminaries,  the former US Treasury Secretary, Morgan Stanley’s ex CEO and Citibank’s former chief executive are all investing in a revolutionary new form of financing called Peer-to-Peer (P2P) lending! These well-respected veterans of finance who have managed governments and multi-billion dollar organisations, believe that the future of banking will involve borrowers and investors bypassing the big banks and lending directly to each other through P2P marketplaces.

So how does this all work? Essentially, applying for a P2P loan is very much like obtaining a loan from a bank. However, unlike a bank where you might have to go down to the branch, the majority of P2P lending is done via an online application in a 100% paperless process. Once that application gets submitted, assessed and approved, the funds are provided directly by investors, not the bank’s coffers, which means interest rates are generally lower than with traditional banks. 

Peer to Peer Lending

The truly powerful feature of P2P lending is their ability to introduce custom pricing for borrowers, something the banks have been unwilling or unable to do. Personalized interest rates are a form of risk-based pricing has already been standard practice in car insurance and to a degree, health insurance. In simple terms, with this type of model, better borrowers get better rates. A borrower’s credit score and credit history are a determinant of default risk, and therefore ultimately, of interest rate on a loan. In the traditional bank model, quality borrowers with low default risk and good credit history, pay the same high interest rates as riskier borrowers. We think there’s a better way. 

In a recent interview with AFR’s Capital magazine, Matt Symons, CEO and co-founder of Australia’s only P2P lender SocietyOne, explained how his platform is targeting mainly prime borrowers looking for a better deal. “It is crazy there is no risk-based pricing. If someone can come in and disrupt that, I think the banks are vulnerable.”. 

SocietyOne uses a highly automated credit assessment process to screen loan applications before listing them on the P2P platform for the benefit of investors. Investors have their own credit and risk parameters and spread their investment across a number of different loans, therefore minimizing and diversifying their overall risk while maximising returns.

Will Social Lending Continue to Grow at its Current Rate?

With banks continuing to stick to their rigid lending conditions, it is difficult to see social lending stagnating any time soon. Many experts in the global finance community expect it to keep growing at a rapid pace. One of the reasons they expect continued expansion is because it will be very hard for legacy-system burdened banks to mimic this type of social lending and successfully apply the underlying technological end-to-end online platform capability to their own business model. As Renaud Laplanche, CEO and founder of US based Lending Club, the largest P2P lender in the world put it, “in the same way book stores haven’t been able to replicate Amazon”, neither will the major banks be able to replicate this form of social lending. 

The other reason why this form of finance is expected to grow at an accelerated rate is because of its track-record of providing consistent returns to investors and lower rates for borrowers. Bad debts have been kept to a minimum as platforms cherry-pick only the best customers, which has given more and more investors the confidence to consider P2P lending as a viable fixed income alternative.

About the writer: Abey Malouf is the Head of Marketing & Communications at SocietyOne, Australia’s only active P2P lender. For more information on P2P lending, borrowing and investing ,visit www.societyone.com.au

About Denny Jones

Hi there! I am Denny, a personal finance blogger and I love to share tips related to managing finance for a better living. Follow my blog for lots of fresh and exciting tactics to control your finances.
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