The rise of P2P lending and the future of banking

P2P lending has sure sent the town talking about it. But is it really as disruptive as we think it is? Is it really going to revolutionize the lending...

Snehal Fulzele 20th December 2013

P2P lending has sure sent the town talking about it. But is it really as disruptive as we think it is? Is it really going to revolutionize the lending industry? What will happen to the banks if P2P lending continues to grow in popularity? These are some of the questions that come to mind when we think of strategic implications of P2P lending and are certainly worth investigating further.

But before we even begin to answer these questions, let us first just look at plain facts from the past:



1. Have you noticed? The interest rates have fallen.

According to SeekingAlpha, an industry observer & researcher, the average interest rates on credit cards have fallen from a peak of 15.2% in 2007 to 13.1% this year. Well, that doesn’t mean much. But it is worth noting that the period between 2006 – 2008 also marked the beginning of some of the now popular P2P lending businesses such as Lending Club and Prosper etc.



2. The rapid growth story

According to Business Insider, the two biggest players in the segment, Lending Club and Prosper, have seen a stunning 195% growth in the last one year with loan portfolios over $1.5 billion. It is yet to be seen whether P2P lending is a short sprinter or a marathon champion. But if the trend is something to go by, then it certainly seems to stay put in the long run.



So, now let us try and answer some of the questions we raised earlier.



Disruptive: Yes, we believe that P2P lending is disruptive. Time and again we witness a breakthrough to do away with traditional business models. Remember iPod, emails and e-books? These disruptive new ways have transformed their respective industries completely. Similarly P2P lending is reorienting the lending landscape by providing a medium where borrowers get funded for lower rates and investors get better returns for their money as compared to bank deposits or even investing in the markets given that the risk factor is comparable in both cases.



Future of banking: Banking is seeing transformation in both of its core services – payments as well as lending. While payments service is being transformed by digital payments and mobility, lending is witnessing rise of new business models such as P2P lending, crowd-funding etc. Banks will certainly have to adapt to new ways of business and quickly so, in order to stay competent.



Future of P2P Lending: While P2P lending is changing the lending landscape, it is also undergoing continuous changes especially from a legal and regulatory perspective. In the near future this trend will continue and we will see more boundaries being defined for P2P lending businesses to operate within the realms of the regulations.



What do you think P2P lending is headed to? Share your thoughts by commenting below.

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