Peer to peer (P2P) lending owes its existence to a need for lending efficiency. P2P platforms intermediate between investors and borrowers in a way established banks never could, opening up alternative finance options.
As a result, P2P lending has blossomed and there are now countless P2P lenders operating both B2C and B2B.
With so many P2P players now in the field, P2P providers will again need to turn to efficiency. This time, to adapt to what we're calling the Instant Economy: a host of forward thinking businesses that can instantly access and consume B2B services to bring innovative products to market quickly to satisfy customer demand as fast as it develops.
In this article, we highlight six essential efficiencies that P2P lenders must adopt to compete in the Instant Economy.
Early P2P lenders were forced to develop lending platforms from scratch. Now, as P2P lending becomes more commonplace, several vendors have emerged that specialise in developing white-label lending platforms. Even cash-strapped P2P start-ups can launch with cutting-edge infrastructure.
The choice of lending software is crucial: both the borrower and the investor experience must be highly fluid and hassle-free, making sure customers do not drop off when signing up. Core operations need to be relentlessly efficient too because the Instant Economy is changing the way consumers experience financial services – think high visibility and fast responses.
Efficient vetting of borrowers
Choosing to approve or decline an applicant has always been a difficult balance between growing a loan book and limiting losses on unpaid loans. Increasing customer expectations are complicating matters as borrowers expect instant offers with accurate rate quotes and fast approval, and immediate pay-out thereafter.
P2P platforms have several options. First, AI-enabled algorithms can make more granular lending decisions by considering more factors. Furthermore, the broader Open Banking initiative gives lenders deeper insight into customers, with quicker access to more data on which to base lending decisions. Indeed, P2P lenders cannot ignore Open Banking because it is a leading enabler of the Instant Economy – not least because Open Banking makes credit applications far more hassle-free.
Seamless payment processing
But all the slick speed and efficiency in the consumer facing front end means little if a platform is reliant on old and manual pay out. Payments, both outbound and inbound, are a key cog in the P2P lending machine yet one that is a real headache particularly in the light of the transformation to the Instant Economy: borrowers want their loan funds instantly. Thankfully, payment solutions have the capacity to dramatically drive P2P lending efficiency.
It’s why payment service providers, like ourselves, have developed full accounts payable and receivable automation to take away the reconciliation headache through automatic segregation of funds. The right payment solution also enables P2P lenders of any size to match the responsiveness expected in today’s Instant Economy by instantly paying out loans or investment withdrawals.
Unobtrusive anti-fraud and money laundering measures
Financial fraud is not going away and just like all other financial institutions, P2P lenders must guard against misuse, but not at the expense of bona fide customers. The alternative nature of P2P lending arguably makes lenders an attractive target, so highly efficient KYC and anti-fraud measures are essential.
Banks are also making life difficult for P2P lenders, while FCA regulation requires P2P lenders to put in place money laundering checks. So, lenders must aim for efficiency when reassuring their partners, without rejecting profitable customers. It may be why many have turned to the emerging fintech ecosystem, where API connectivity is transforming the way services are distributed to the wider network, with consortia of FinTechs offering regulatory, payment and technological solutions in one easy package.
Ruthlessly efficient marketing
P2P lenders compete not just against the banking brands that consumers trust, but also against a growing roster of P2P lenders. Building brand recognition and getting heard above the noise is no easy task, but efficient marketing delivers benefits. Importantly, P2P lenders must apply the Instant Economy marketing narrative: openness, responsiveness, and more convenience for less friction.
A focus on efficient customer retention is essential too – both borrowers and investors – as this reduces the reliance on the expensive and comparatively inefficient process of customer acquisition.
Effective debt recovery procedures
Finally, every lender will be familiar with the challenges of late payments and unpaid loans. Loans in arrears and loans that go unpaid have a notable impact on investor returns. P2P lenders that can drive an efficient debt recovery process will stand out from their competitors.
Whether P2P firms choose to outsource debt recovery or decide to do so in-house, the focus must be on maximum recovery alongside minimum manual effort. Lenders must also take the lessons learned from customers that fail to meet their obligations, adjusting borrowing criteria accordingly.
Technology: the cornerstone of efficient P2P lending
Financial services as we used to know it has changed. In the Instant Economy, financial services firms operate on a more open and more efficient platform. P2P lenders had an early bite at the efficiency pie, matching lenders and borrowers in a way that optimises investor goals while offering a unique lending product.
To continue growing and to fend off the new business models emerging from the Instant Economy, P2P lenders will need to play on their efficiency strengths. In many ways, P2P lenders are essentially technology outfits and it is technology that drives P2P lending efficiency and indeed technology that drives the Instant Economy.
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