Banks bite back
High street banks are investing in innovative technologies and developing peer-to-peer “hybrid” models, as competition with the sector heats up
TRADITIONAL lenders are ramping up investment in new technology, amid intensifying competition from P2P platforms, say industry insiders.
“The need for banks to innovate is clear,” said Katrin Herrling, chief executive and co-founder of alternative finance platform Funding Xchange. “Some have lost significant market share, for example to Funding Circle in the business lending space.
“Banks need to ask themselves, how do I compete with the slicker experience that [P2P lenders] provide and how do I reduce my underwriting costs by automating some or all of my underwriting so I can compete with newer players?”
Alistair Hutt, head of third-party partnerships for RBS, said that “without a doubt,” P2P was one of the factors that had caused banks to change. “What the emergence of P2P did for some banks was make sure they were accelerating their own development and sorting their legacy systems,” he said.
Last month Barclays launched a SME lending app, which drastically reduces the amount of time that the bank takes to approve a business loan, from a few weeks to under an hour.
“We have seen businesses choosing funding from P2Ps due to the speed and ease with which they could provide funding, even where this has cost the customer a premium,” said Daniel Fairhead, head of lending product management at Barclays.
“We recognised this some time ago, and by enabling pre-assessed lending for our customers, we can process a loan application in as little time as one hour through our latest mobile application – meaning we can also be fast and convenient.”
Several banks are in the process of creating a hybrid between the P2P customer experience and bank lending, according to Herrling. The new lending solutions will use the same type of technology, processes and understanding of underwriting as fintech firms.
“It’s happening, but it will take banks quite a while to build viable business models around platform lending,” she said. “Many P2P lenders have built deep expertise in specific sub-segments of the market – either from a customer or product perspective – and are thriving because they understand the needs and risk profile of their chosen niche.”
As well as competing with P2P, banks may start expanding into the sector. Last month, it emerged that London-headquartered financial technology provider Misys is launching software to enable banks to provide P2P lending to their customers.
“Banks are losing market share to P2P platform providers. By embedding crowdlending into the overall credit lifecycle, a bank can maintain and expand its client base, recapture business from alternative finance marketplaces and boost lending growth,” Jean-Cedric Jollant, senior product officer at Misys, told Reuters.
A number of experts predict banks will increasingly partner with fintech firms to address this innovation gap.
“We will see banks move into more specialist areas,” said Jeremy Grime, analyst at FinnCap. “I think when they do they’ll buy some of these firms. They will buy their loan book and expertise in underwriting and technology, to fix their problems.”
A spokesperson from RateSetter said: “P2P lending platforms have set new standards in the financial industry, particularly when it comes to speed and service, but we don’t have a monopoly on innovation. Healthy competition between incumbents and new joiners is a good thing for consumers.”