Collaborate or compete?
Peer-to-peer lenders are getting increasingly involved with the very incumbents they set out to disrupt. Is this the key to the P2P industry’s future or the path to its demise?
IN THE tech-forward 21st century, the answer to the age-old question of whether to collaborate or compete with your commercial rivals is more mutable than ever. It’s increasingly apparent across many sectors that collaboration is on the rise – if the self-driving car poses an existential threat to incumbent auto manufacturers, why has JLR signed a deal to sell 20,000 vehicles to Google spin-off Waymo? And if traditional banks are what so many peer-to-peer lending platforms were set up to beat, why are they increasingly succumbing to the urge to sign up these old-school incumbents as partners, referrers or investors?
On one level the popularity of such deals, such as the tie up between Zopa and Metro Bank, or the referral arrangement between Santander and Funding Circle, reflects the simple desire of the P2P partners to acquire more customers and grow more quickly via the extended marketing reach of the incumbent. Surely something that every entrepreneur can relate to.
But is there a catch? Does the rise of collaboration threaten the founding principle of P2P – the desire to beat the banks at their own game by being better, faster, cheaper and more open lenders providing a vastly improved customer experience?
At least one senior industry figure seems to think it might. “We are in direct competition with banks. There is no point being mealy mouthed about that,” Rhydian Lewis, chief executive and co-founder of RateSetter, said recently. “Collaboration can mean that the landscape doesn’t look that different to the man in the street in a few years’ time. But with competition you might see new brands emerge.”
So for Lewis, the clarity of competition is more likely to result in better customer outcomes than the rather more nuanced business of collaboration. A spokesperson for RateSetter confirms it has no partnerships with mainstream banks, and no immediate plans to pursue any. It’s an unashamedly purist approach that hasn’t stopped RateSetter from becoming one of the big beasts in the sector, with getting on for £2.5bn in loans under its belt since opening for business in 2010.
But as more and more P2P platforms sign up banks as partners – in March, for example, MarketInvoice’s existing funding deals with Banco BNI Europa of Portugal and Germany’s Varengold were boosted by £90m and £45m respectively – it’s an approach which is also increasingly at odds with the prevailing orthodoxy.
So which view is right?
“Collaboration is inevitable, there is no point fighting it,” says Neil Faulkner, founder of P2P analysis firm 4th Way. “The purist idea of P2P is a nice ideal but there is no law written that says that is what P2P is for.”
The advantages, he adds, are simply too great to ignore. “Collaboration helps to keep the deal flow going, and to achieve the scale which is necessary for platform efficiencies to really work. Also most platforms have backers who want to see growth – that’s what they have been promised.
“So, many platforms have no choice but to collaborate if they want to survive, never mind grow.”
For Metro Bank, the success of its deal with Zopa is down to having complementary interests.
“We’re effectively an institutional investor,” says Kat Robinson, retail products director at Metro Bank. “Metro has a strong deposit base, Zopa was – and is – on a growth trajectory and looking for fresh capital. It’s a natural fit.”
Initially Metro was investing a fixed monthly sum but after a year that shifted to a more flexible arrangement. “Now it goes up and down, we meet regularly and have conversations about it,” adds Robinson. “It’s been a really positive experience and we will try and replicate that flexibility in other partnerships too.”
Neither party shares any figures on how much has been lent as a result, but both seem pretty happy with the way it has panned out. Jonathan Kramer, head of capital markets at Zopa, says that it works because the pair share a similar customer-centric outlook, as well as dovetailing financial and marketing strengths.
“Our partnership with Metro brings together two likeminded financial challengers which share a similar ethos of providing an excellent customer experience,” he explains.
“The fact that Metro has chosen to lend directly to consumers through our platform, is a strong endorsement of our ability to originate and underwrite high quality loans. Like Metro, all institutions which lend through Zopa put the platform through detailed scrutiny – something both institutional and retail investors should take confidence from.”
As well as the obvious benefits of a ready supply of funding to help smooth out the bumps inherent in matching borrowers with lenders, Robinson says that Metro has learned some more unexpected lessons, too, about the importance of cultural as well as strategic alignment. “Are these people you really want to work with? You are going to be spending a lot of time with them,” he states. “Cultural fit is now higher up the list of things that we look for in a partner than it would have been otherwise.”
But even the best collaborations come to an end eventually – will the fact that Zopa is turning itself into a bank bring down the curtain on this lending double act? No, says Robinson. “We have talked to them about it and we don’t think it will affect the relationship. The bank will be sufficiently separate from the platform we work on.”
It’s a positive view of collaboration that is borne out by a recent study of the wider fintech community from Capgemini and LinkedIn. The World Fintech Report 2018 found that no fewer than 75 per cent of the fintechs it surveyed cited collaboration with traditional firms as their primary business objective.
That’s a huge proportion. Why is the desire to collaborate so high on the start-up priority list? “When the fintech revolution began, there was a lot of noise about them taking over the financial services sector,” says Chirag Thakral, deputy head of financial services MI strategic analysis group, Capgemini.
“But that turned out to be just noise, because both fintechs and incumbents have strengths and weaknesses that are complementary. They deliver best value by collaborating.”
Bank customers want Google-style service, he says, which is where the fintechs excel, but fintechs lack scale, and are less trusted to handle people’s money than incumbent banks. Punters may not like the way the big old brands treat customers, but the fact remains that they are well established and have a track record of security that slick new start-ups simply cannot match.
Collaboration helps a bank learn from the agility of the partner as well as their technical expertise, while the fintech benefits from the brand association, customer reach and process expertise of the bank, adds Thakral.
“Today the discussion is not about whether to collaborate, but how to do it most effectively,” he says.
But should such tie-ups come with any caveats around the possible impact on customer choice? Collaboration after all is a word with two very different meanings. A collaboration can be the joint authorship of something positive like a book, a research paper or a new product or service. But it can also refer to something much darker – ‘traitorous co-operation with an enemy’.
Andy Davis, author of a pair of influential reports on P2P for the Centre for the Study of Financial Innovation, says it is not a binary choice between collaboration and competition, because more of one could actually result in more of the other. “If a bank and a P2P collaborate and in doing so serve a customer in a way they were not served before, that’s increased choice and potentially more competition,” he explains.
The question of whether P2P lenders and banks should collaborate or compete depends on your perspective, according to Davis.
“At a policy level, there is a desire for more competition,” he says. “But at the level of the commercial interests of the individual platforms, their agenda is to maximise customer benefits and shareholder returns.”
Read more: P2P platforms facing hybrid dilemma
He also points out that there are many different ways to collaborate, from a bank referring an existing secured borrower to a P2P platform for an unsecured loan, to full-on institutional investment such as those aforementioned MarketInvoice deals.
So it’s a pragmatic rather than a philosophical decision that should be driven by commercial considerations above all. “With lending it’s determined by risk appetite,” he adds. “A bank might like fewer of the risks it looks at, and a P2P platform more, potentially.”
This is effectively the basis of the government’s referral scheme, a kind of mandatory collaboration whereby banks are obliged to refer rejected loan applicants to alternative providers who might be prepared to approve them. It’s performing, says Davis, “roughly as you’d expect”.
Collaboration works because it allows both parties to play to their respective strengths. “A P2P lender can arrange for anyone who wants to, to borrow money,” comments Davis. “We have seen that. A bank, with all its associated costs, might conclude that while the origination of SME loans is expensive, it would still like some of the yield.
“A successful fintech has a low-cost origination engine. A bank has a high cost of origination but a low cost of lending.” So while it may suit the purists to stick to their guns, for others a mutually-beneficial collaboration really does look like the proverbial win-win. As the P2P industry grows and evolves, it seems likely that the opportunities to collaborate with the incumbents will do as well.
This story featured in the May edition of Peer2Peer Finance News, now available to read online.