Whether or not banks should offer P2P lending platforms themselves is a tough question to answer as the business models of the P2P industry and the banking industry is both very similar and yet very different.
Banks are for example heavily regulated, which can make it difficult for them to enter this newer and more unregulated P2P market. At the same time, the banking industry is very huge compared to the P2P lending market, so from a bank’s perspective, the P2P industry might not seem that attractive after all.
Before the P2P industry gets bigger and more regulated it wouldn’t make much sense for most banks to offer P2P lending platforms themselves.
However, as the P2P industry evolves and gets more regulated, banks could very well enter the market.
Banks vs P2P lending platforms
Though banks and P2P lending platforms both fall under the umbrella of lending, their operational models and risk profiles differ significantly. On one hand, traditional banks are heavily regulated, based on rigid structures, and are required to maintain substantial capital reserves to protect against default risks. These traits often result in a slower, more stringent loan approval process for borrowers, and lower returns for investors due to the myriad of intermediaries involved in the process.
P2P lending platforms, on the other hand, operate in a more flexible environment, with fewer intermediaries and lower overheads. This has allowed them to offer faster loan approval and disbursement processes and higher returns to investors or lenders. Moreover, P2P platforms tend to have access to alternative credit scoring models, facilitating loans for individuals and small businesses that might have struggled to receive financing through banks.
Pros of banks offering P2P lending platforms
There are a lot of potential advantages for banks offering P2P lending platforms themselves. Here are some of the primary advantages:
1. Diversification and revenue boost
As the P2P lending market continues to grow, banks could leverage this opportunity to diversify their income streams and boost revenue. Entering the P2P lending space could help banks tap into a wider customer base and cater to segments such as the unbanked and underbanked populations. Moreover, it could help banks compete with emerging fintech players and maintain their market share in an increasingly digital lending landscape.
2. Enhanced customer experience
By offering P2P lending platforms themselves, banks could increase accessibility and convenience for customers seeking loans. P2P platforms are primarily online, meaning potential borrowers can apply for loans and receive funds without needing to physically visit the bank, saving time and improving the overall lending experience.
3. Risk management and capital efficiency
Through P2P lending platforms, banks could potentially reduce their exposure to default risk by channeling investment funds from multiple lenders to borrowers, thus dispersing the risk. This approach could benefit both the bank and the lenders, who can diversify their portfolios and earn higher returns on their investments.
Cons of banks offering P2P lending platforms
Even though there are a lot of advantages to banks offering P2P lending platforms themselves, there is an equal number of disadvantages to doing this:
1. Regulatory burdens
One of the main challenges that banks face in entering the P2P lending space is the regulatory burden associated with their heavily scrutinized operations. Offering P2P lending platforms involves adopting new regulations and processes that may be at odds with the existing rules that govern traditional banking. In the short term, such an endeavor could pose significant legal, compliance, and operational challenges for banks.
2. Brand reputation risks
Part of the appeal of P2P lending platforms lies in their reputation as agile, innovative, and customer-centric alternatives to banks. This perception might be at risk if established banks start offering their own P2P lending platforms. Moreover, any operational slip-ups or regulatory missteps could potentially tarnish the entire banking brand.
3. Cannibalization of existing business
By entering the P2P lending market, banks risk cannibalizing their traditional lending services as customers could potentially migrate from established banking products to the new P2P platform. This could result in the loss of revenue from the existing business, even as the P2P platform endeavors to establish a foothold in a highly competitive market.
The question of whether banks should offer P2P lending platforms themselves hinges upon weighing the potential benefits against the risks and challenges involved. As the P2P lending landscape continues to evolve, with regulatory frameworks becoming increasingly robust, banks should assess the opportunity to include P2P platforms in their portfolio strategically.
Ultimately, for some banks, partnering with fintech companies to co-create P2P lending solutions may offer a more viable route for entering this space. A collaborative approach could help banks leverage the strengths of fintech partners while navigating the complexities of regulation and brand reputation. Resultantly, this alliance would ensure a broader range of comprehensive financial solutions and opportunities for customers.