Technology is at the very core of peer-to-peer lending, but is the industry in danger of losing its competitive edge?
PEER-TO-PEER lending has blossomed off the back of innovative technology and is now providing a viable alternative to mainstream financial services.
But as traditional providers start to see the benefits of fintech, how can P2P maintain its market position as a disruptor?
Industry observers say the key pillars of P2P technology are improved borrower and investor journeys compared with banks, faster decision-making capabilities and loan book transparency.
P2P platforms come in all shapes and sizes, but most are in agreement about the importance of in-house technology to create their core infrastructure and set themselves apart from their competitors. This was the approach that P2P property platform Landbay took when readying for launch.
“The value of being in-house is that you can set the architecture yourself and drive change more quickly,” explains Julian Cork, chief operating officer for Landbay. “There is no big legacy technology to build on.”
Greg Carter, chief executive of business P2P lender Growth Street, agrees that it is beneficial to develop your own technology.
“When we started we tried to find third-party providers ranging from bespoke software houses to big players,” he says. “But we couldn’t find anyone that could provide the platform we wanted to build.”
However, while P2P platforms often prefer using in-house technology for building up their loanbook and bringing on borrowers and investors, they are happy to outsource more specialist functions such as client money protection and anti-money laundering.
“We wanted to focus on our core competencies, but there is no point building something new when you can buy generic capabilities such as security checks,” adds Landbay’s Cork.
“We don’t want to be in the business of checking passports, it is much better buying that than building.”
Another element where some platforms have been outsourcing their technology is in managing their Innovative Finance ISA (IFISA).
Platforms such as Landbay, Ablrate and LandlordInvest use P2P software provider and administrator Goji to manage their IFISA reporting.
Asset-backed P2P lender Ablrate said back in June that it would be more “cost effective” to use a third-party provider for its tax wrapper.
“We decided to go with Goji as it’s easier for us to outsource the technology,” chief executive David Bradley-Ward told Peer2Peer Finance News at the time.
David Genn, chief technology officer at Goji, says they are also seeing increased requests from platforms looking to become more adviser-friendly.
“Financial advisers and wealth managers don’t want to have to deal with individual platforms and want to be investigatesable to access diversified lending products that are structured in products suitable for their clients,” he explains.
“We’ve created a diversified bond that invests across multiple direct lending providers and is structured as a regulated, fixed-term bond that is IFISA eligible. This is only possible using technology as it allows us to integrate with multiple providers and handle maturity matching, diversification across sector, asset and platform, and manage credit risk.
“We’ve also created a web-based platform to enable financial advisers to manage their client’s accounts and investments.
“Individual platforms could, and have, produced their own financial adviser offerings but the feedback we get from the market is that diversification and a regulated product structure are key features they want, so we expect there to be a continued role for companies like Goji to provide the technology to make this possible.”
Mambu, which offers a platform for managing deposit and credit products and works with P2P lenders such as Flender, says outsourcing certain aspects helps firms focus on their key differentiators.
“We are talking to lenders who are now starting to expand but from a technical perspective they realise what they build in-house won’t empower them to scale further,” says Michael Pierce, account executive at Mambu.
“We allow them to focus on what differentiates them and we sort the tech.
“From a business perspective, traditional P2P lenders all have the same commonality, something built in-house, but now they realise there is a new country or product line or area of finance and the cost of doing that with their existing system is higher than using an outsourced platform that takes it off their plate.”
Of course, the risk that comes with building an individual tech proposition is culpability if something goes wrong.
For example, earlier this year, Lendy had a problem with new deposits not showing up on certain accounts, but emailed investors quickly to inform them of the glitch. And in August, Zopa experienced a technical issue that resulted in a small amount of money seeming to have disappeared from some investors’ accounts, which was also quickly resolved.
But there can be IT problems outside of a platform’s control. For example, if a banking website goes down, the lender is no longer able to accept deposits or let users withdraw funds. This is something that P2P pawnbroker Collateral knows about only too well, as its banking partner Santander temporarily had a problem with its online portal in July.
“Dependence on a supply chain may create problems,” explains Lucian Morris, a fintech specialist at Deloitte. “There is a question about your supply chain and making sure you don’t have a knock-on effect if things go wrong. We should see more delineation of responsibilities in future.”
Goji’s Genn believes security is one of the biggest reputational challenges in P2P.
“There are some platforms that have great technology and take security and resiliency extremely seriously,” Genn says.
“There needs to be an acceptance that regardless of a platform’s size, if a customer loses personal data or money or a transaction fails then the impact for that customer is the same regardless of the size of the platform.
“This means platforms need top-grade technology from day one. There is currently a large disparity in the sophistication of the technology between different companies and it is difficult for investors and borrowers to assess this.
“When you choose a plumber to service your boiler you can check their certification – there is no way to do this for the technology that is storing your personal data and processing your money. I think there would be value in the industry self-disclosing more details on their underlying technology so customers can make informed choices.”
But Laurence Wilks, head of IT for P2P property platform Lendy, says many of the challenges may be linked to technology but are more about how issues are managed.
“The key challenges are in fact less technically focused and are more centred around generating a reputation for reliability, usability and providing offerings that are attractive to the target customers,” Wilks says.
“Reliability and resilience of the platform are key aspects of building confidence. The innovative use of proven technologies backed by solid IT principles around uptime, availability and data protection feature strongly.
“Well-defined procedures, processes and monitoring reflected in the platform are key to providing transparency which helps to highlight and eliminate abuse and fraud.
“That’s not saying we don’t occasionally have glitches – they are inevitable in any fast-moving business. Key though is being able to react quickly when they occur, and our lean and agile IT environment helps to ensure we are highly responsive.”
One emerging way P2P lenders are set to have their reputation and reliability tested is with the imminent introduction of open banking, as banks will have to share consumer data with third-party providers, including alternative lenders.
“A number of interesting changes are occurring, potentially giving P2P lenders the opportunity to access data about borrowers that they never previously had,” Morris adds.
“A lender could ask for access to bank accounts and make more informed decisions on borrowers.
“It means you can make a better decision on whether you want to lend and what the appropriate rate to lend at is.
“There will be a race to implement that technology to keep yourself on the leading edge.”
Carter says Growth Street sees Open Banking as an “iPhone moment” for financial services.
Growth Street is one of 20 fintech firms participating in innovation charity Nesta’s Open Up challenge, which supports the development of tools and loan products to help small businesses access open banking once it launches.
“We will be able to ask customers for access to their bank current account data and we can then access their full transaction record, which is one of the most important data sets that banks use to underwrite loans,” explains Carter.
“P2P lenders will be able to offer more flexible loans as we will be able to understand transaction history, be more aware of expenses and can check affordability more easily and automatically.”
But Landbay’s Cork is more hesitant, warning that customers may not want to be bombarded by their P2P lender.
Instead, he says it is important to be linked with aggregators involved in open banking such as fintech firm Bud.
The other emerging technology currently shaking up the financial services sector is blockchain, but Morris says P2P lenders could benefit more from using artificial intelligence (AI).
“AI potentially has more use in P2P than blockchain technology,” he asserts. “You could get AI to understand variables and teach itself credit scoring. Teaching the AI to track a loan through its lifetime could end up with AI smart enough to make much more informed decisions.
“This increases profit margins whilst adding efficiency and profitability.”
There are other areas where some feel P2P could do more. For example, very few P2P lenders offer apps, in contrast to the banking arena where such technology is commonplace.
“P2P is behind on the consumer side of technology as it has invested most of its resources in the core infrastructure of a new business model,” Carter admits.
There are plenty of challenges and opportunities for P2P technology and platforms have already shown how quickly a sector can grow and innovate, in contrast with banks.
It is how the platforms capitalise on their historic creativity that will now determine their future.
This feature appeared in the December edition of Peer2Peer Finance News, which you can now read online by clicking here.