August 29, 2014

Banks could bolster top line by partnering with P2P lenders

Banks could generate more revenue by adding P2P originations to their branch originations, according to a study recently released by research firm Cognizant.

P2P borrowers desire branches
In the poll, 43 percent of P2P borrowers identified branch availability as the top feature they would want in a lending platform, according to American Banker. In addition, 89 percent these borrowers listed this feature in their top three.

The study's findings are certainly worthy of mention, as none of these nontraditional lenders have branches or ATMs, the media outlet reported. This situation - and the desire expressed in the study for branch locations - could generate some compelling opportunities for banks and P2P lenders to work together.

Fed stresses growth prospects of P2P lending
While these opportunities have been cropping up, the amount of loan origination stemming from P2P lending has been growing sharply. Lending Club and Prosper, the two largest companies in this space, originated $2.4 billion in loans in 2013, almost 200 percent more than they issued in 2012, according to figures provided by Cognizant and reported on by American Banker.

A Federal Reserve paper also spoke to this robust expansion, noting that P2P lending has surged an average of 84 percent every quarter since the second quarter of 2007. At the same time, various measures of bank lending have declined, Yuliya Demyanyk and Daniel Kolliner wrote in the paper.

Bank lending's steady decline
The total amount of money lent out by bank-originated consumer-finance loans has fallen an average of 2 percent every quarter since the second quarter of 2007. In addition, the total debt lent through bank-originated credit cards has dropped an average of 0.7 percent per quarter.

While the P2P market's growth far outpaces that of banks, its scope remains hundreds of times smaller than that of the credit card and consumer finance markets. However, this particular activity is well-positioned to expand, the authors asserted.

They cited several factors when making this assertion, noting that both supply and demand for P2P lending are on the rise. Borrowers are taking an increased interest in these opportunities, as more of them are looking to consolidate their credit card debts or apply for loans after being denied by traditional banks. In addition, investors are supplying more funds for these loans. Institutions - such as hedge funds, family offices and banks - have become involved, whereas originally, P2P lending involved retail investors and individual borrowers.

Banks have specific advantages
While P2P firms are benefiting from a multitude of factors, banks have specific advantages on their side, according to American Banker. Banks have greater lasting power, as P2P firms are primarily startups and many could go out of business.

If operated by banks, P2P lending platforms might have more stability. In the poll, 74 percent of respondents specified that they would trust one of these platforms if it was run by a bank, the media outlet reported.

There are other ways these two industries could work together, as banks could let P2P borrowers make payments or work with customer service staff at their branches, according to the news source. For the use of their property, banks could potentially charge a fee. In addition, establishing such a situation could increase the number of people coming into branches.

In either of these instances, banks and P2P lenders will need to develop strong relationships. One good way to foster these is to work with an honest intermediary that has knowledge of both businesses. Companies that want to explore these opportunities might consider speaking with Garnet Capital Advisors, which has substantial experience in this area.