P2P: A constant evolution
Angus Dent, chief executive of ArchOver, considers the role of institutional investment in peer-to-peer lending…
A FUTURE based on two questions: How does it balance institutional and retail money? And is manual investing here to stay or will it be manoeuvred out the more sophisticated its audience becomes? The character and purpose of the sector are at stake – can P2P maintain its original values and purpose without sacrificing profitability?
P2P worked to the premise of sourcing money from individuals and lending it to businesses, earning the sector’s keep somewhere in the middle. ArchOver has always been open about the fact that it accepts institutional money as well – but the shift towards institutions in the sector has accelerated in recent years.
Rather than having to get tens of thousands of individuals involved at enormous cost, P2P platforms are doing more to facilitate institutional lending, bringing in more investment at a reduced outlay. Because you’re not spending as much marketing dollar, your chances of hitting profitability are much higher.
But is that business model still recognisably P2P? The identity of P2P has changed and will continue to change. Some industry players have distanced themselves from the term altogether in favour of a pureplay borrower focus. The same is true of manual, project-by-project investment: it’s still a core component of ArchOver’s platform, but others have done away with it altogether. At the same time, ArchOver recently launched its Investment Plan, which gives investors an instant portfolio. It’s important to have a balance between manual and automated investments to suit a wider range of investor needs.
The introduction of more institutional money and automated investing does matter because, at its heart, P2P is a process of disintermediation. Whenever companies put automated vehicles in place, they reintermediate. Running these vehicles costs money, and that filters down to lenders getting a lower return, because they have to pay for the service and protection.
The bottom line is that there’s a fine balance between preserving the original values of P2P and generating enough institutional money to make it profitable.
The core market conditions that have always accompanied P2P are unlikely to change. The high street banks could encroach on P2P, but there’s no appetite in the sector for such a move. Some of the challenger banks are touching on P2P’s market, but still with a traditionalist banking bent and without the agility of smaller players.
In contrast, as more institutional money enters the sector, the cost of facilitating lending should go down, making it easier for P2P platforms to make a profit. Furthermore, there are large numbers of savers and investors who still just don’t trust the banks – they’re happy to pay the premium for alternative finance as a form of insurance.
ArchOver aims to find the balance between all of these things – between providing a service to individual lenders, borrowers and institutional investors, and balancing regulatory requirements with turning a profit. In three years’ time, we would expect a larger proportion of money lent over the platform to come from institutions, while preserving a place for individual lenders. Manual and automated lending will also be balanced on the platform, so that lenders can get the desired level of control over their investments.
P2P has a bright future. Companies like ArchOver have the agility and the entrepreneurial spirit to evolve their business model without losing sight of their core values, to the benefit of lenders and borrowers alike. Institutional money will play a key part in the next stage – but it’s just one part of the picture.
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