We already know what commercial banks do. For centuries they have taken deposits from savers and lent them to borrowers. The last decade, however, has seen non-banks entering this business in a trend called ‘peer-to-peer’ (P2P) lending, whose pioneers include Zopa, Prosper, Lending Club and Kabbage. Their ‘P2P’ label comes from computer networking and the legacy of Napster and BitTorrent.
In loans, however, P2P is a misnomer: a better modifier would be automated. At Zopa and co, transactions go not through humans at a bank branch but through a website that robotically matches lenders to borrowers. Seen this way, P2P is just another step of banks’ mechanisation, like the replacement of tellers with cash machines. Automation is of course cheaper, and websites go anywhere, 24/7. So, through lower costs and broader reach, P2P has opened a low-end market not previously profitable enough for banks to serve: small, unsecured loans at modest interest.
Otherwise, P2P lenders are much like banks, except mostly unregulated and riskier. Or maybe they are banks?
The rise of robotic loans
Regulators will surely force them that way. A scandal or two will invite them to clamp down on P2Ps. Business logic will also drive banks and P2Ps together. Already in 2014 USA-based Union Bank and Lending Club partnered on personal loans, followed shortly by Europe-based Bank Santander teaming with Funding Circle on small-business credits. The Royal Bank of Scotland paired up also with Funding Circle in 2015, and then early this year launched its own P2P, Esme, for small businesses. Swiss banks are not yet that far, but the local Internet already abounds with independent P2P lenders: some 10-15 were named in an October 2017 survey by Swisscom. They include names such as Cashare, Lendity, loanboox and swisspeers.
The United Kingdom is where P2P lending started, and in its 12 years from the 2005 launch of Zopa to late 2017, it’s become significant. According to the Peer 2 Peer Finance Association, UK P2P loans now total around GBP 7.1 billion – nearly 8% of net consumer lending and 17% of net credit card debt in Britain. In Switzerland, P2P lending is less prominent: outstanding loans totalled CHF 8 million in 2015, reports a study from Swisscom and the Hochschule Lucerne. Although today’s sum is estimated at CHF 25-35 million, it’s still not even 1% of the CHF 7 billion owed on credit cards.
Credit card competitor
One reason for lower Swiss penetration could be the smaller differential in interest rates. In the UK, interest rates on P2P money are about half of those on a loaded credit card, while Swiss rates for both are in the same range. That aside, the process in both countries is similar: users log onto a website, provide some financial basics and usually within 10-20 minutes are on the road to borrowing or lending. On average loans are small, in the UK about GBP 4,000 and in Switzerland about CHF 2,000, yet size is rising quickly.
Do lenders get their money back? There has been one major fraud so far: some 1 million lenders to a Chinese P2P named Ezubao lost a reported USD 14 billion in 2014, after the P2P was unmasked as a Ponzi scheme. Default rates are not known globally, but in the USA they are pegged at around 5% of loan volume, says P2P analyst LendingMemo. This is substantially higher than the US average consumer-credit-default rate of 1%, but not enough to scare off the flood of P2P lending, now estimated at USD 40-50 billion and climbing at 30-50% annually.
Back to banks?
In two major respects, says FinTech expert Jesse McWaters of the World Economic Forum, P2P lending is not turning out as envisioned. First, what was meant to be peer-to-peer is more ‘institution-to-person’…kind of like a bank. Not too surprisingly, more borrowers than lenders have signed up for P2P, so to fill the funding gap, money has been wooed from professional asset managers – who now supply an estimated half of the loan volume. There is even a 2012-founded firm called Prime Meridian Capital that focuses all its USD 100-million+ assets on P2P loans.
Second, P2P profit is proving harder than expected. As intermediaries, institutional lenders of course take a slice of the pie. Additionally, as more players pile in to P2P, competition climbs. Zopa, the original P2P lender, earlier this year lowered its returns to lenders in response to tightening margins (and to plug the hole of a major default). As interest rates in general start rising from their current historically-low levels, contends analyst 4thWay, P2P spreads will shrink yet again.
The likely response, McWaters says, is that P2Ps will become even more like banks: to cut cost they’ll offer deposit accounts that provide capital more cheaply than institutions. Along with those accounts, they will likely offer payments, overdrafts and other conventional services. Zopa applied mid-2017 in the UK for a banking license, Prosper has done the same in the USA and the imaginatively named Boober has followed suit in The Netherlands.
Is it FinTech or BankTech? In lending, over time they seem likely to become the same thing.
Julius Baer and FinTech
Will robots ever take over the jobs of relationship managers in the private banking industry? Only time will tell. At least for a bank like Julius Baer, where the human factor is a key element of its service model, the prospect is rather unlikely. But this doesn’t mean that technology is insignificant. On the contrary: without cutting-edge IT, a bank like Julius Baer couldn’t cater to the very complex needs of its clients. In order to push the technical boundaries even more, the Bank joined the F10 FinTech Incubator and Accelerator Association in October 2016, supporting promising start-ups from across the globe on their way to innovate the financial industry. In our ‘Insights’ section, we will cover the progress of this initiative regularly and talk to movers and shakers of the FinTech scene.