The Bankwatch

Tracking the consumer evolution of financial services

P2P Lending platform pricing and a comparison to the traditional bank model

There is lots of discussion these days on the topic of P2P lending, and when I saw Claus post on pricing the other day, I knew it was a hot button topic.  Now that the post has been there a few days, I thought I would offer a few more thoughts on at least what I see as the significance.

Thoughts on Future Pricing for P2P Lending Service | P2P-Banking.com

Now years after launch, most p2p lending service are “short” of (good) borrowers. Their lenders have a surplus of capital that could be lend out, would there be more loan applications on the platform. And typically customer acquisition costs are much higher for winning new borrowers than for winning new lenders. Furthermore borrowers must be acquired over and over again, whereas lenders remain customers for longer periods of time and reinvest capital.

The logical consequence would be for the p2p lending marketplace to change the pricing. By charging borrowers less and charging lenders more, the value proposition to borrowers would be lower APRs, attracting more borrowers.

If we analyse it, part of the reason we in the industry believe a better model is needed is that the current approach of banks that work on spread is flawed in favour of banks and against customers when it comes to loans.  Mortgages are competitive by being matched against similarly scheduled deposit instruments;  in Canada those are Guaranteed Investment Certificates (GIC).  Banks are able to match 1 year through 5 year GIC against 1 – 5 year terms on mortgages.  The competitiveness in the pricing is reflected in low mortgage rates and even lower GIC rates. 

It occurs to me that one of the strategic advantages of P2P Lending, in whatever form, is that it disintermediates traditional bank funding matching.  Banks must match products.  Everything is on their balance sheet, so maturities, yields, terms and cost of capital are all part of driving efficiency out of their balance sheet.

P2P lending platforms are not focussed on balance sheet efficiency but on customer value.  Instead of matching financial instruments (e.g. mortgages and GIC’s) which represent bank needs, P2P matches customer needs.  The mortgage /GIC matching drives prices down for everyone which is very good for some (mortgagee’s) bad for some (GIC holders) and bad for banks whose spread is devastated in a low interest rate environment.  Incidentally I am not defending banks.  I am merely pointing out that financial product matching as used by banks is not efficient nor win-win.

P2P is able to match customer needs – those of investors (Lenders) seeking fixed or variable interest returns, and those of borrowers who seek lower rates than they would otherwise get on unsecured lines of credit or credit cards.  P2P lending platforms have no financial product balance sheet.  This is essential to understanding one of the basic benefits of these platforms. 

The issue of product matching is immaterial to the P2P platform who participates by way of relatively modest fees and is ambivalent to the transactions interest spread, other than ensuring the best possible rates for borrowers and lenders.

Relevance to Bankwatch:

Back to the P2P-Banking.com post.  Claus is correct that broadly speaking the relativity of rates presented to borrowers and to lenders is critical and must represent supply and demand but more importantly must be better than the alternatives and the alternatives are banks.  P2P cannot give it away for free nor can they gouge.  There is more than enough spread between certain customer needs that are offerred by banks that can be represented in P2P Lending platforms that offer enough to provide an adequate return for the P2P yet still provide for better lender yields and borrower rates.

Written by Colin Henderson

March 2, 2011 at 23:27

Posted in Uncategorized

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