Peer-to-peer lenders’ innovative use of technology is what first set them apart from the banks. But as the industry matures, what are they doing to maintain their competitive edge? Danielle Levy investigates…
MORE THAN 13 YEARS have passed since the first peer-to-peer lending platform, Zopa, opened its doors in the UK.
During this period, the rate of technological change has been rapid – and the growth of the fintech sector is a testimony to this.
Looking ahead, with Open Banking and Artificial Intelligence (AI) still in their infancy, P2P platforms are going to find it difficult to stand still.
Neil Faulkner, founder of P2P analysis firm 4th Way, believes that growing competition from platforms and challenger banks will foster further technological development in the P2P lending sector.
Read more: RateSetter dips toe into Open Banking
“I would say they all need to step up because they are going to face more competition on the borrowing and lending side from platforms and newer digital banks,” he says. “The competition will force them all to enhance their technology to make it smoother and more automated.”
So what does the future look like for P2P technology?
Open Banking presents the P2P sector with a huge growth opportunity, according to Faulkner. The initiative, which was introduced in January 2018, allows big banks to share customers’ transaction data with third parties. This should ultimately improve competition and pave the way for new products and services.
A number of P2P lenders are already utilising Open Banking. Zopa has launched an income verification tool that automatically pulls in customer data made available through the data-sharing initiative.
Meanwhile, Lending Works has partnered with credit reference startup Credit Kudos to provide its Open Banking infrastructure. This will automate the process of applying for credit on the platform by removing the need to manually fill out forms and upload documents.
Faulkner expects that platforms will start to offer more financial tools which drawing on the application programming interface (API) data which is now available from banks, with some shifting towards banking.
Jonathan Hodge, chief operating officer at RateSetter, notes that as P2P becomes an established element of the financial services eco-system, “interoperability” and the need for P2P platforms to work efficiently with other financial services businesses will become more important.
“This will mean a focus on developing API and data protocols and increasing the efficiency of transaction flow,” he adds.
Stuart Law, chief executive of Assetz Capital, also views Open Banking as a significant development for the P2P sector. In order to truly capitalise on the opportunities presented by the initiative, he predicts that some platforms will introduce AI.
“To make proper use of Open Banking data, you are going to have to start looking at AI and other things that can make sense of lots of bank statement pages that are electronically connected,” he explains. “I think that with Open Banking comes, in many cases, the need for AI.”
While Assetz Capital does not currently use AI, he says it is on the platform’s ‘project list’.
Combined with Open Banking, Chris Hancock, chief executive of Crowd2Fund, expects to see greater use of blockchain technology in the P2P space.
“There are benefits to having a globalised, standardised financial database that everyone can plug into,” he says. “It is secure and non-corruptible, with the objective of reducing money laundering, crime and fraud. It is a no brainer. From a regulatory perspective, I predict that any financial institution will be forced to integrate with the blockchain.”
Crowd2Fund is already reaping the benefits of using AI. Firstly, it underpins the platform’s ‘Smart Invest’ feature, which automates the process of loan selection for time-poor investors, based on their profile and attitude to risk.
Secondly, the platform uses AI and big data to automate their due diligence process when deciding which businesses to provide loans to.
“We analyse the 101 different variables for every business,” he explains. “It allows us to approve or reject businesses for listing on the platform much more quickly and accurately. It also allows us to augment third-party data into the system, so we can make more accurate decisions.”
Finally, Crowd2Fund uses AI software from Australian fintech firm InDebted to assist with debt recoveries. It uses big data analysis and algorithms to forecast which loans could become delinquent. With already-delinquent loans, it will also work out the likelihood of that loan being recovered.
Crowd2Fund applies this technology to synchronise business data on its platform, which then sends time-sensitive triggers to businesses that are in arrears to prompt them to make payments.
“We have noticed an uplift in investor confidence in our recovery process and our ability to minimise defaults over the longer term,” Hancock adds.
Another area where Hancock sees big opportunities is mobile – an area of technology that the industry has been surprisingly slow to tap into.
It has certainly been high on the agenda for Crowd2Fund for a long time and continues to be. The company was the first debt crowdfunding platform on Apple’s App Store when it launched in 2016.
Close to 50 per cent of Crowd2Fund’s users have an iOS phone and 50 per cent of those use the app.
“The app usage has steadily increased and we can also tap into new pools of investors,” Hancock says.
Assetz Capital’s Law also highlights mobile as an area to watch. In the future, he says that platforms will need to invest heavily in mobile app development – and this means “traditional software won’t hack it”.
“There is a big overriding thing that people don’t spot: younger people do not use computers,” he asserts. “They only use phones and they expect a simple user-interface on a phone.
“We are talking about an entirely different suite of software that is required if you want to engage younger people. That may not matter to a business today, but eventually over the years core users or borrowers are going to be of that generation.”
Another development to look out for is a potential move towards white label technology solutions, particularly for new entrants.
“Who on earth would start from scratch now reinventing the wheel when you can launch fast with an affordable, secure, reliable service?” asks Jude Cook, chief executive of white label software provider ShareIn.
Cook says that ShareIn is currently seeing strong demand for technology to assist with Innovative Finance ISA (IFISA) administration. She estimates that 80 to 90 per cent of new clients require IFISA functionality.
Faulkner agrees that a shift towards white-labelling could lie ahead. He suspects that it will become an extra revenue stream for platforms with established technology.
While it can help a new entrant to get up and running quickly, he believes it does not represent a good long-term solution. For example, if a platform decides to change its model as it learns from its users, it will require flexibility from its technology to do so.
“It is not something you would expect a platform to do forever,” Faulkner explains. “If they want to grow, they will need to move things in-house, so they have control over their unique selling points (USPs).”
Assetz Capital’s Law echoes Faulkner’s sentiments. “White label has its place, but it is not for companies that are trying to create any USPs from the technology,” he adds.
This explains why Assetz Capital has developed all of its systems in-house, including loan management and money management.
“Anything that is core to our business functioning well, then we write it and control it in-house,” Law explains.
Nevertheless, this means the company’s research and development budget is sizeable.
One of the challenges associated with keeping technology in-house is making sure you hire the right talent; Law notes that the UK’s plan to leave the EU next year has made this process more difficult.
“It has been pretty tough since Brexit,” he adds. “We have had European applicants cancel job offers, which means we have had to outbid other people. We are contributing to IT salaries continuing to go through the roof in the UK.”
However, Crowd2Fund’s Hancock takes a different view. He thinks that after the UK leaves the EU, it could widen the pool of technology specialists coming into the country.
“Having a controlled immigration and talent system means that we can have more engineers from around the world, not just Europe,” he states. “But it is still important to make sure that the engineers that are here are looked after.”
Looking ahead, Faulkner suggests that a number of platforms will up their game by investing further in their technology.
“To compete and survive there is going to be a continual race to lower costs and that is going to involve smoother technology,” he comments. “Some platforms still have ad hoc secondary markets, which aren’t really automated or they manually authorise payments. Technology is going to need to make things smoother.”
Faulkner’s comments are mirrored in a recent white paper released by identity verification solutions provider Mitek, authored by fintech research firm Autonomous NEXT.
The report urged digital lenders to invest further in their technology, in order to cut costs and take market share away from traditional banks.
A know-your-customer and anti-money laundering check could cost as much as $150 (£117) per customer, the report said, which could be reduced by up to 70 per cent by investing in digital identity verification solutions.
P2P platforms are well versed in technological innovation and disruption – skills that will help them evolve and thrive in an increasingly competitive market.
This article featured in the December issue of Peer2Peer Finance News, now available to read online.