We’ve all witnessed the digital revolution sweep through many business categories in recent years and seen how much disruption has been caused.
Spotify and other online music services have changed the way people consume music. This change has been so dramatic that it’s even shifted millions of people out of the category killer iTunes
The television and film industry has experienced a seismic shift from the all-powerful film conglomerates such as Fox and Paramount to online television service providers like Netflix (for more information see Di’s blog post from last week). Big entertainment successes of late like Orange is the New Black & House of Cards have been produced by Netflix and, of course, HBO’s Game of Thrones.
And of course online shopping has forced massive change in the retail sector with online sales now over $15b annually or 7% of total retail sales in Australia. Brands like Amazon, Kogan, Catch of the Day, Booktopia and The Iconic have now become household names.
Now, the next industry to experience big digital disruption is lending – and peer to peer (P2P) lending to be more precise.
The current paradigm of course is lending institutions. When we need a mortgage to buy a property or a personal loan we head to a bank or building society. But now P2P lending is starting to emerge and generate interest with both investors and borrowers alike.
What is P2P lending? Well, as the name suggests it connects lenders and borrowers directly. Often this occurs through online style ‘auctions’. Very often the loan is comprised of many small loans from different lenders.
Why is P2P lending growing? Firstly, because if offers a better deal for investors. For example, Zopa, the British P2P platform offers 4.9% to lenders when banks only offer a fraction of this. Secondly, because borrowers can secure funds for much less than they’d otherwise pay via a traditional financial institution. Zopa only charges 5.6% interest on a personal loan.
P2P lending is growing fast in many countries. According to The Economist, loan volumes are doubling every six months in Britain and they just passed the $1.7b (AUS) mark. In the U.S Lending Club and Prosper have 98% of the P2P market and they issued $2.4b (U.S) in loans in 2013, up from $871m in 2012.
Whilst P2P lending is tapping into the above mentioned financial incentives, it also arrived at a time when the public was somewhat dissatisfied with banks and was also increasingly connecting with products and services online. Neil Bindoff of PwC argues it was a “perfect storm” for P2P lending.
Add to this the fact that awareness of this new offer is still very low with, according to a PwC survey, only 15% of Britons claiming to have heard of the big P2P brands such as Zopa, Funding Circle and RateSetter, and some would argue that growth of this new dimension in financial services will continue to grow.
Of course there are negatives, the primary being in regards to regulating this fledgling sector. What happens if the platform you’ve invested money through collapses? Or if they have insufficient funds to cover loans should some go bad? What about capital adequacy? All good questions and ones that are being contemplated by regulators around the world.
Here in Australia we have SocietyOne which is starting to become more active and grow. Check out their website here. Many of the questions you may have like ‘How does it work?’, ‘How is credit risk assessed?’ and ‘How private is my information if I apply for a loan?’ are answered by SocietyOne.
I’m not convinced about the security of P2P lending but what do you think? Is this the next big thing?
Well, Google seems to think it might be. They’ve invested $125m in Lending Club which values it at $1.55b (U.S). And SocietyOne has a large Australian Bank as a major investor.
I think we should all watch this space.
In the meantime I’ve got a taxi to catch…..or should I say an Uber.
Paul Cornwell is a Managing Director at BCM