Peer-to-peer lenders are increasingly expanding their scope of business, and banks can choose to either compete with the disrupters, or collaborate with them to boost their own bottom lines. Either way, banks have the opportunity to transform their models by adopting some of the P2P lenders’ best practices in offering enhanced customer experiences.
One of the nation’s largest P2P lenders, San Francisco-based Prosper Marketplace, is broadening its model even further with two recent acquisitions. The first, a $21 million deal for American HealthCare Lending announced in January, enables Prosper to leverage American’s established network of point-of-sale lending at doctor’s offices. Under the newly rebranded Prosper Healthcare Lending, the P2P lender is now offering loans to patients at those offices to cover elective medical procedures.
This month Prosper announced its second acquisition, a $30 million deal for BillGuard, which offers smartphone apps with fraud protection for consumers’ debit and credit cards, as well as the ability for users to track their spending by category. Prosper will use data from those debit and credit cards to market its debt consolidation loans and other consumer loans to BillGuard users.
Many banks are choosing to collaborate with P2P lenders to boost their own bottom lines. In April, Prosper announced $165 million in equity funding from investors that included SunTrust Banks, as well as units of JPMorgan Chase, BBVA and Credit Suisse. Moreover, USAA, BBVA, and SunTrust are working with Prosper to offer co-branded loans. It’s main P2P competitor, Lending Club, currently has co-branded relationships with Union Bank and community banks that are part of BancAlliance.
In the February report, “Peer pressure: How peer-to-peer lending platforms are transforming the consumer lending industry,” PwC outlined the pros and cons of the different ways that banks could either collaborate or compete with P2P lenders.
Banks can collaborate with P2P lenders by purchasing loans, either as a general investor or as a preferred investor, by setting up predefined investment criteria and automating the purchase transactions. The pros of purchasing loans include the opportunity to round out credit spectrum or acquire loans in an area where financial institutions wouldn’t traditionally lend; the ability to apply proprietary credit risk models to analyze information provided by P2P platforms to target the best investments; an economical way to diversify without adding more staff or expanding loan servicing platform; and the addition of a new asset class that could generate attractive risk-adjusted returns. The cons include no opportunity to build relationships with borrowers and no opportunity to cross-sell other banking products.
Another way banks can collaborate is by co-branding products with P2P lenders through a white label partnership, according to the PwC report. The pros include that co-branding requires less capital expenditure than building a new platform and can be operational quickly; it leverages the P2P lender’s lower cost structure and/or technology capabilities; and it gives banks the ability to offer customized credit policies and pricing. The cons include the dependence on P2P platforms for infrastructure; additional compliance risk management and third party oversight responsibilities; less flexibility to customize the experience than if banks were to build such platforms on their own.
Alternatively, banks could develop their own P2P platform and compete directly with existing P2P platforms, depending on its strategic goals, according to the PwC report.
“Many banks are looking for ways to grow through product innovation or new channels; the P2P lending market provides access to borrower segments that wouldn’t be accessible through traditional means,” the authors wrote. “A P2P lending marketplace can also serve as a platform to innovate new products and processes in the digital space.”
The pros include flexibility and control over the customer experience; ability to offer more innovative products; a direct way to claim a piece of the market; cross-sell opportunities through direct interactions with customers; potential integration with other existing interaction channels such as call centers or branches to offer customer more choices; new income stream from loan origination, servicing, and other fees; and the ability leverage the new platform to make other lending channels more efficient.
The cons include that the new P2P offerings may not align with the core competencies of most banks; difficulties involved with establishing a user base and reaching critical mass; potential cannibalization of own business; cost and timeline of developing P2P platform; and regulatory implications and compliance costs.
Banks should consider developing a response to P2P lending that aligns with their organization’s goals and capabilities, and key considerations should include the level of consumer savvy within their markets, their capability to innovate, capital constraints and risk appetite, and regulatory compliance expertise.
“Even if you choose not to collaborate or compete directly with P2P platforms, P2P’s use of technological features and relentless focus on the customer experience are areas where banks will likely need to make changes to remain competitive,” the authors wrote.
Tery Spataro is EVP and Director of Innovation, CCG Catalyst, a management consulting firm offering strategic advice to banks. Follow CCG Catalyst on Twitter and LinkedIn.