Payments are pivotal
Myles Stephenson (pictured), chief executive of business payment solutions provider Modulr, explains why investing in new payments technology is essential for the growth of P2P…
If you look at the growth rates, the future looks bright for peer-to-peer finance providers. The sector, which was practically non-existent in 2010, was worth £2.5bn in 2016, with a 40 per cent year-on-year increase from 2015-16. The four leading P2P platforms saw double-digit growth last year, while the P2P lending sector as a whole has become one of the leading categories amongst the alternative finance sectors. This rapid growth has not gone unnoticed by regulators and competitors alike and there are challenges that need to be addressed if the sector is to sustain its impressive growth rate.
The first of these challenges is security and fraud management. It’s an inevitable and growing threat casting a potential shadow over the booming sector. More than 50 per cent of platforms surveyed by the Cambridge Institute of Alternative Finance saw breaches and malpractice as a threat to the industry at large. Platforms have a clear responsibility to minimise the chances of first-party, fundraiser and borrower marketplace fraud. Effective protection of client funds, know your customer (KYC) and anti-money laundering processes will be key.
Competition is also beginning to mount beyond other platforms and non-bank lenders. Both Barclays and NatWest have recognised the challenge and are fighting back with automated lending platforms for small- and medium-sized enterprises. They aim to replicate the many benefits of simplicity and rapid loan approval that new entrants are promising and have the deep pockets required for marketing and product investment to try to offset these threats.
The response for P2P lenders is to continue to strive for even better ways to serve customers. While a key part of this will be offering innovative products carefully tailored to the needs of specific customer segments, delighting and engaging services are also critical. Building trust and satisfaction will mean rapid customer onboarding, self-service portals for status checking, instant access to customer information so queries and problems can be resolved quickly, proactive communications for repayment reminders and receipts and rapid transaction times.
Implementing these growth strategies will mean streamlining core competencies to improve the customer offering. Payments is one of these critical competencies. Complex payments flows are at the heart of what alternative finance providers do. As platforms evolve with more intricate product offerings, the levels of payments complexity are only likely to increase, along with the likelihood of unnecessary overheads and risk of errors. P2P platforms also face the unique challenge of managing complex payment flows between the borrowers and investors while ensuring compliance and protection of client funds. Faster, more complex product offerings have created a catalyst for change.
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Fortunately, the stars are aligning in the payments industry with regulatory changes (including PSD2 and the open banking Initiative), a well-funded fintech sector and subsequent developments in new technologies. A new generation of service providers now offer more effective means of processing in-and-out payments with simplified reconciliation and dedicated payment accounts that allow a different way to deal with client money segregation.
These new technologies facilitate instant payment account creation, highly flexible and immediate payment initiation and ongoing ledger reconciliation. The physical separation of payment accounts is essential, ensuring protection of client funds, transparency in reporting and a simpler approach to compliance. Once initial KYC checks are completed, multiple accounts can be opened instantly, making customer onboarding quick and clean. The technology also facilitates flexible 24/7 payments initiation, eliminating the need for batch payments while avoiding manual errors and first-party fraud risks.
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As P2P lenders emerge into their next growth stages, there will be an intense need to support an increasingly complex product set, at scale, while maintaining customer trust and satisfaction, meeting compliance requirements and ensuring platform flexibility and security. These demanding times have created a catalyst for change. Effective payments will form the new tipping point, adding that competitive injection upon which P2P platforms can build a bright future.