Who hasn't borrowed from a friend or family in times of need? P2P (peer to peer) lending concept is probably as old as money itself. But why is it attracting so much attention now?
Technology is fundamentally disrupting the long established business models of yesterday. Today the largest cab company does not own a single cab (Uber), largest hotel company does not own a single hotel room (AirBnB)...so it is conceivable that tomorrow the largest lender may not own dollar of deposits with them. It is all about connecting the demand with the supply at a large scale and technology is exactly the thing that is fueling this transformation at a rapid pace. P2P lending marketplaces, which connect individual borrowers and lenders bypassing the traditional financial institution, are bringing this disruption to the lending world. Globally, the peer-to-peer lending market is gaining traction and is expected to cross US$ 1 trillion by 2025. Leaders, such as Prosper and Lending Club, have originated loans worth US$ 9 billion so far.
The Indian scene is also warming up. In 2015, about 20 online P2P lending firms came into being. At present, about 30 P2P lending start-ups are operational in India.
Seeing the momentum, the Reserve Bank of India (RBI) recently made a move to regulate the country's so far unregulated P2P lending business. The RBI is being proactive in regulating online P2P lending because of its potential impact on both traditional banking channels and Non-Banking Finance Companies (NBFC). At the same time, there is the realization that P2P lending could fulfil at least a part of the nation's rising credit demand, and that too in a cost effective manner. The regulator's viewpoint on P2P lending is evident from its recent paper which seems to suggest that while seeking to regulate, it will not be heavy-handed in defining the rules for this new business.
How should our banks view these developments? Banks clearly have multiple opportunities here. Firstly, they could cater to potential borrowers whom they (or their traditional peers) may have previously returned for want of 'amply high' credit scores or 'lack thereof'. Secondly, P2P networks provide a high-risk/high-return alternate investment mechanism for banks customers who may be willing to diversify their funds and become potential lenders in this upcoming arena. Thirdly, banks can also expand the scope of P2P Lending as a potential marketplace, wherein they get to push their current products/services to visitors on P2P network. The marketplace model ensures that unlike traditional banking where borrowers used to reach out for banks' products, quite the reverse takes place i.e. banks get to proactively pitch their products to an expanding network of potential customers. Fourthly, with the tech-savvy young generation taking center-stage, P2P Lending is aptly suited to be pushed as a well-knit mobile app, to transform the borrowing and lending experiences of this generation and increase stickiness. Further, banks are realizing that the borrowing of future may not solely be for traditional reasons spread over mid-to-long term. It could be for 'here and now' reasons such as:
• A shopper opting for a peer loan, right at the point of checking out of an online shopping cart.
• A consumer seeking instant loan for an exigency, to be paid back immediately upon receipt of salary.
• A small business seeking short-term capital to cater to a large purchase order and gradually expand their business.
• A medium-to-large company wanting to establish a trust-driven fraternity among its employees, to provide for each other's needs in times of exigency, with salary-deduction considered as a recourse measure to mitigate non-repayment risks.
A plethora of such emerging needs of day-to-day nature may not be high-value in nature, yet lie somewhere above micro-financing needs, thereby providing a tangible business opportunity for banks operating such P2P networks. Those are arenas where Indian banks can disrupt the emerging fin-tech disruptors and tap new opportunities. Leveraging their existing infrastructure for credit know-how and associated decisioning models, banks are most suitably placed to play a larger role in establishing P2P networks.
As the technology partner of a very large number of banks around the globe, including several in India, EdgeVerve offers full support to clients on this journey. We also offer the EdgeVerve marketplace lending network to co-create a P2P lending network of retail, SME and corporate customers. In a world that is connecting and collaborating with increasing intensity, there is no way that Indian banks can stay on the fringes. Through this platform, we hope to help them become an important part of the P2P lending ecosystem.