The Bankwatch

Tracking the consumer evolution of financial services

BankerVision: The reaction of bankers

 James is worried about the right things here.

“For the first time ever, I argued, the special economic role of banks as the primary intermediaries between actors in markets is being challenged. Previously disruptive innovations in banking, (for example, Internet Banking) didn’t actually interfere with the special role that banks have in society. Non bank payment systems and P2P lending? These go right to the core of what banks have traditionally done.

My point was that the business model of banking itself is now being touched by parties that aren’t banks.”

Source: “BankerVision: The reaction of bankers – Mozilla Firefox”

He goes on to point out the growth rates of one example, Prosper.

When you average the number of originations per month since January, I’m seeing a growth rate of just over 32% per month. In July, they wrote $235,000 in business. On average since launch, the value of loans originated is increasing 38% per month, although in June and July there was a substantial reduction in this growth rate. …..

Now admittedly, in the scheme of things, that’s not a large amount of revenue. But consider the cost side. Interest Expense? Zero.

He’s drawing the right conclusions.  The Zopa and Prosper models have to be the start of something big.  This is ebay, or Amazon again.  Creation of a new business model that can only exist in this Internet age. 

I am not sure about the articles conclusion though.

Actually, I think that the banks that choose to partner with non-bank sites like Zopa and Proper (and do it before the competition) will be on a winner.

First of all, I don’t know why they would want to partner with a Bank. Their success is because they are not a bank, and the things we bring to the table, risk assessment, collections, funding, are not required, or as a minimum we are too expensive.

The new model works by certain amounts of disclosure that banks would never do about the borrower and depositor.  There is a level of trust established that transcends the transaction, and creates an incentive on the borrower to pay.  Failure to live up to the trust means that the borrower would be locked out of future transactions.

Banks lend based on security, and credit ratings.  Zopa is in effect a niche lender focussed on small amounts, unsecured, lent to creditworthy borrowers.  Key is that this model eliminates lending personnel, banks largest cost.  We analyse the borrower, analyse the security, and evaluate the transaction.  These steps are eliminated at Zopa and Prosper.  By selecting a niche, they are able to bring lenders together with depositors at almost no cost to themselves.

The niche selected, is not dissimilar to the credit card space. But credit cards have all the costs associated with networks, marketing, and call entrees.  This model takes the core lender and depositor elements and with nothing added on, facilitates the interaction.  Its ultra low cost.  Banks cannot do that.  We would have to set up a separate group and run in competition with ourselves, and we hate that model.

Relevance to Bankwatch:

This is truly a disruptive model and its not at all clear to me what the solution is, but Banks had better take it seriously.

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Written by Colin Henderson

August 26, 2006 at 00:19

Posted in Uncategorized

4 Responses

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  1. I’d argue that there are several good things that a bank could bring to a P2P loan site that would make it an attractive partnership.

    It seems to me that the economics of P2P would be somewhat less attractive if you’re doing secured loans of any type, but this is something that banks are good at and where the real money is. Also, banks have trust and security assets, branding and otherwise, which could go some of the way to addressing the 30% of loans unfunded problem. And it might be the case that a bank that adds its brand to P2P goes some of the way to cashing in on the anti-establishment sentiment that may be driving P2P, whilst bringing big end of town credibility.

    From the bank perspective, if there is an appropriate revenue share, I’d think a partnership of this kind would be highly lucrative. The economics are compelling. Practically no cost for a nice fee income stream. And certainly the larger banks aren’t competing all that hard for deposits anymore, especially when wholesale money can be had more cheaply.

    I guess the key question is whether P2P loans are cannibalizing the traditional markets of banks or if this is new business that otherwise wouldn’t’ have been written.

    No way of knowing that, I expect, until P2P is big enough to measure in terms of a significant market.

    James Gardner

    August 26, 2006 at 09:11

  2. “I guess the key question is whether P2P loans are cannibalizing the traditional markets of banks or if this is new business that otherwise wouldn’t’ have been written.”

    I like this point. Banks by their risk averse nature wait for markets to evolve before entering. If P2P lending is in fact the next ebay, it might actually replace much of bank’s lending.


    August 26, 2006 at 10:44

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  4. P2P lending for family and friends.

    Charles Polanco

    November 11, 2006 at 23:59

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