Anyone who has kept an eye on the financial services landscape over the past decade will have noticed that digital technology is transforming and disrupting many traditional product markets. The latest innovation is from PayPal, an early pioneer in online payments, who are offering a smartphone app to help get your money back if you've lent it to family and friends.
The concept of the shared economy which brings peers together (P2P) is no longer something vague – it is transforming the foreign exchange market, the hotel and travel industry, and even helping people find car parking spaces.
Most significantly in the UK, P2P is changing a number of retail financial services markets including the provision of unsecured and secured loans to consumers and to small businesses and the supply of working capital to SMEs by means of invoice finance.
Read more: P2P trust raises £400m
For consumers looking to invest or save, P2P lending platforms offer a good alternative to either traditional bank savings accounts (which may have deposit protection but where rates are abysmally low) or to other investment products, which tend to be equity based and higher risk.
Costs and charges are lower, as P2P platforms have low cost bases and are able to pass these savings on to their customers. Modern digital systems allow very transparent information to be provided and excellent customer service to be given. Platform based technology also allows for rigorous credit risk management, and average default rates on loans have been below 3% over the last 10 years.
We’ve seen that member platforms, which cover 90 per cent of the market, have together lent over £3bn so far in the UK, and the figure is expected to rise to over £4bn by the end of 2015. Even more consumers look set to benefit from investing in P2P lending from next April when it will be tax protected within an ISA.
Business lending is changing too. Creditworthy small and medium-sized enterprises (SME) are increasingly looking to P2P lenders for business loans as well as for invoice finance. P2P platforms can offer a quick and efficient service and competitive interest rates, with no penalty charges for early repayments.
Many SME customers are eligible for loans from their bank but prefer P2P because it provides a quicker turnaround and better service. Others may have been rejected for a bank loan because they are in newer, less familiar sectors of the economy (like tech or creative industries) and their assets tend to be more intangible, despite the fact that they are credit worthy. P2P platforms also provide bridging finance for the commercial property market, helping support the UK shortage of affordable homes.
From the broader perspective of the shared economy, it is not yet clear what technological innovation will do to a wide range of traditional markets. What will happen to service models in finance, media, retail distribution and transport? Where will we finance our living accommodation in future? How will we define savings in ten years’ time? How will buy our groceries? How will we travel?
From a financial services point of view, many familiar high street brands have recognised the power of the sharing economy and are now working with peer-to-peer lenders. This is something we welcome.
Others, who may be challenged by changes in technology and market dynamics, find it is easier to adopt scaremongering tactics to try and dampen the growth of innovation and competition. What they fail to recognise is that many consumers now feel empowered by digital technology and the shared economy, and enjoy and value the easy access they now have to good value products and services that weren't available before. For this growing group of people there is no turning back.
P2P may be relatively new, but it is here to stay.