For several years now, P2P lenders such as Funding Circle and Lending Club have been picking up the slack left by the banks' falling appetite to lend to small and medium-sized enterprises (SMEs).
However, incumbent banks and new lending platforms now look set to work together to serve these customers.
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Jean-Cedric Jollant, |
Jean-Cedric Jollant, senior product manager, crowd lending at Misys, says: “SME loans have been down among the biggest lenders in the US by over $20 billion between 2007 and 2014, which is the same amount that has been lent through P2P in the same timeframe. There is definitely a shift taking place.”
Since it was launched in 2010, Funding Circle has provided $1.8 billion in financing for 15,000 businesses. The numbers are becoming large enough for the banks to take a closer interest.
Moreover, the banks are recognizing the importance of keeping these customers happy while facing political pressure to accommodate small companies that have been denied financing.
Jollant says SMEs will often try banks first to get better rates, which can be around 4%. This is in comparison with interest rates at Funding Circle, which typically start from 6%, and increase depending on the assessment of the individual customer.
He notes: “If they cannot say they will provide the loan, they can at least suggest an alternative partner.”
Banks are coming to realize they have substantial resources to make working with P2P lenders beneficial to themselves as well as to borrowers.
Jacqueline Morcombe, principal solutions lead, lending at Misys, says banks are seeing new opportunities to profit from existing capabilities.
“Banks are incredibly concerned about the competition," she says. "But they have the architecture and credit and risk-management processes to leverage P2P principles within or alongside their own systems and use it as a way to diversify risk and provide finance where they have struggled in recent times.”
Santander success
One bank that has already taken the move is Santander. It has been working with Funding Circle for two years. The bank’s focus is on providing better-quality customer service by referring customers to the platform if the bank itself cannot provide financing. Following its success, Funding Circle signed a similar agreement with RBS at the beginning of the year.
The reciprocal agreement allows Funding Circle to pass on some of its clients to the banks if they are in need of additional banking support. Funding Circle has also gained access to international markets it could not previously reach.
In the US, Lending Club already has agreements with Union Bank and Alliance Partners, which manages the BancAlliance consortium of small local banks.
Santander does not take any fees from the borrowing clients it refers, but not all banks will operate in this way.
Misys' Jollant says this potential to take a cut will make collaboration even more appealing, adding: “The bank is earning through two points – taking an origination fee that can be around 3% to 6%, and a second 1% fee for payments processing and servicing the account. There is certainly money to be made through P2P for the banks.”
Banks will no doubt be delighted if they can make this money while dumping the actual credit risk on investors coming through the P2P platforms, so avoiding capital charges. But it is the banks’ strategic funding advantage that makes forging partnerships such an attractive prospect for both parties.
Jollant says: “Lending platforms are struggling to find the investors, but the bank has that. The investors stick to the bank whether rates are up or down, while investors lose confidence in the online platforms.”
The loan-servicing infrastructure within banks gives them the ability to offer more as part of a facility, including additional levels of security.
“Banks could leverage their infrastructure to recover the defaulting loans which online lenders don’t support,” says Jollant. "Funds may be able to offer insurance at a premium, but banks can do this at almost no cost."
Mandatory referral
The next stage might be the potential opening up of a mandatory referral process. The UK government has assessed the possibility of SMEs being referred on to alternative lenders if their banks are unable to provide funds. These borrowers’ information will be passed on to a referral pool at the British Business Bank, which P2P platforms can access.
As the regulatory environment becomes stricter for P2Ps, following recent setbacks, continuing growth at the same pace might not be easy. Banks therefore might find they have the opportunity to pick up some parts of the business; even those not actively looking to engage in supporting P2P growth might be laying the groundwork for this eventuality.
Misys' Morcombe says: “It is possible we will see some looking to sell their portfolios as there is a move to further reduce capital cost in the regulatory climate. Banks are future-proofing to ensure they have key fundamentals in place.”