7 Key trends in the P2P lending industry to prepare for

Photo by Maciej Pienczewski on Unsplash

Author: Vit Arnautov, Chief Product Officer, TurnKey Lender

According to Statista, by 2025 the P2P lending market is going to be worth 1 trillion dollars while just in 2015 it stood shy at 64 billion. The industry develops astonishingly fast and it’s not just hype (unlike Bitcoin in 2017). I believe the reasons for lenders and borrowers to switch to P2P are logical and pragmatic, which is exactly why the market will keep growing. As a Chief Product Officer at TurnKey Lender, a company that creates intelligent lending automation solutions, I have to stay alert to any new trends and developments and I’ll be happy to share what I foresee for the P2P lending industry in the near future.

1. More small to midsize lenders will enter the game

For many, the rise of the P2P model opened the doors into the world of financial services. Nowadays, it costs less than ever to get into the lending niche. No need for enormous investments and staff. Even the regulations aren’t as complex as the ones conventional banks go through.

This means that the old-school financial institutions now have a swarm of smaller and hungrier online competitors. But despite being small, the new P2P lenders often provide better service due to recent advances in lending technology and fully automated lending processes.

2. Banks don’t intend to give up

Large institutions have a harder time adjusting to the realities of the digital world and it takes them a ton of time to change their gears. But the boards of directors do see market trends and understand the need to go P2P. Slowly but surely banks worldwide start to introduce P2P functionality.

One of the pioneers in this regard was the N26 direct bank which struck a partnership with auxmoney, a German marketplace lender. Another example would be Monzo with their new peer-to-peer functionality. As of now, it’s mostly digital banks who are willing to start offering peer-to-peer lending. But the old-school banks also have to adjust as they go through their own digitalization. And it’s not just a theory. A prime example would be the Royal Bank of Scotland. All the way back in 2015 the company started to formally refer clients to Funding Circle and Assetz Capital for p2p loans. We can also look at two community banks, Titan Bank and Congressional Bank, who are buying loans through the Lending Club platform.

Traditional institutions often choose to develop their own solutions instead of using and customizing the existing and tested products that are already on the market. This route takes more time, the systems often turn out slow, clumsy, and not user-friendly. This means that only the banks with a more agile approach will adapt to the market to compete against the light-on-their-feet competitors.

Keep in mind, that for many people big banks still bring a sense of security and reliability. So in the nearest future small and midsize lenders will need to work a little harder and to market a little more aggressively to prove to the customers that they are every bit as good or even better.  But P2P lenders are already doing really well and the big players in the field show that the success if very real to attain. Here are some growth stats of some of the leaders in the field:

• Lending Club – In Q4 of 2017 the company had issued $33.6bn in loans, while in Q4 of 2018 they were already at $44.5bn.
• RateSetter – The company announced that their 2017 to 2018 revenue growth reached 47%.
• Funding Circle – As of September 2018, Funding Circle has issued £6.3bn in loans. To reflect upon its growth the company has gone through an IPO.

3. Financial inclusion for underbanked areas

Take the two previous points into consideration and you’ll see that the market wins when a ton of smaller lenders compete with big banks. The loan prices go down and the businesses do their best to reach the previously underbanked areas and demographics. Global financial inclusion is the overarching goal of all the responsible members of the lending community and this competition serves this purpose perfectly.

The lending software providers create better solutions to process more of the right loans safer and faster and the lenders try to tap into new markets and demographics. For example, the AI-powered models used by Upstart (a p2p lending startup by ex-Googlers) result in 75% fewer defaults and 175% more approvals than those of traditional banks. The smart approval processes allow serving the people who were previously underserved in addition to providing a more flexible and fast online experience.

4. More markets and jurisdictions

The more governments see that P2P lending works, the more of them make it legal and start to work with it as they work with other financial instruments. Just last April the Central Bank of Brazil authorized P2P lending across the whole country and new governments join in all the time. For example, in Malaysia authorities introduced a P2P scheme for first time home buyers and in the US peer-to-peer lending is recognized and regulated by the SEC just as well as other financial instruments.

Some countries even go the route of Australia where financial startups can work without a license for a year which is called creating a FinTech sandbox.  Jurisdictions that used similar mechanisms to stimulate the growth of the FinTech sector include UK, Switzerland, and Singapore.

5. Regulations

Don’t expect P2P lending to be the new “Wild West” where lenders can do whatever they want without any consequences. Governments have learned the lessons uncontrolled ICOs taught them.

In addition, authorities have seen China’s bitter experience of letting P2P function without sufficient control. There it led both to drastic growth and to dramatic fall of the industry. So in 2019 more governments won’t only allow and encourage P2P lending, but will also come up with specific ways to control the niche.

FinTech is still very young and governments often have troubles figuring out how to work with it and regulate it. But it’s safe to say that in 2019 the authorities will be far more focused on P2P lending. No one is really arguing that P2P lending is a good thing which should be allowed and encouraged. But at the same time, there are many influential voices who call for proper regulation, which is not necessarily a bad thing. As long as the rules are written to realistically reflect the state of the market and technology, any regulation should only do good in protecting both lenders and borrowers. Some examples that already apply come from the UK, with the ongoing updates from the Financial Conduct Authority to regulatory framework related to the P2P lending market.  Also, in Canada, peer-to-peer lending is regulated under the same laws as securities. And in China, the government’s reaction to the meltdown of the industry was to tightly regulate the niche and weed out any wrongdoers before letting it grow any further.

6. The go-to choice for younger audiences

In Europe, over half of the P2P market is comprised of people aged 22-37. That’s no news that young people don’t want to deal with stuffy corporate organizations and choose the more user-friendly and up-to-date options when they can.

In addition to that young people often simply can’t get a loan on decent conditions from conventional lenders. Mostly since they simply don’t have the financial background baby boomers have. So the trend of young borrowers preferring the P2P lenders will continue.  

7. Fiat currencies prevail in 2019

For a while there it looked like every FinTech project needed to hold an ICO. P2P lending was no exception. But the trend is down for the best.

Either the public wasn’t ready for such a drastic shift of the paradigm or the technology and concept weren’t solid enough. Anyhow, it looks like we’re over ICOs for the time being. Even though projects may still effectively use blockchain as data storing and operating technology, there will be fewer crypto coins and more dollars and cents.

Final thoughts

It’s a great time to be in the P2P lending business. Not only are there still 3 billion unbanked people around the globe with no credit bureau score, but the technology we have makes it possible to get in the game without the huge investments. Now more than ever, all it takes is an entrepreneurial spirit and an idea.

Fortnightly FinTech Fuse ”“ Action Packed Fintech Community!

This has certainly been another action packed few weeks with the fintech community as the financial innovation continues at pace across Scotland.

What makes meeting with the amazing fintech community of firms so exciting is the diversity of action orientated entrepreneurs across the country.

This was very much the case on Wednesday evening with our community FinTech Scotland Fusion evening in Edinburgh.

Action Packed Entrepreneurs

Awesome spotlight sessions from fintech entrepreneurs Daniel of Listing Ledger, Tynah from Money Matix, Adam from Sage City, Dave from The ID Co and Bhairav from Avrium to a very engaged audience.

Once again it was a wonderful buzzing atmosphere of fintech talk, all magnificently overseen by our very good friend and seasoned entrepreneur Aleks Tomczyk.

Big thank you to Kirsty Irvine and Ewan Fleming of Johnston Carmichael for their great hosting of the evening and being such fabulous supporters of the fintech community.

It was a more formal format but just as action packed for the two Fintech Practitioners meetings we held in Glasgow and Edinburgh in the last fortnight.

A great range of conversations on key topics from funding to commercialisation to people development with a spectrum firms from across the fintech community.

Some really key actions from these meetings for FinTech Scotland which we will follow through with the FinTech Network Integrator team at Vivolution and Scottish Enterprise.

Thank you to our strategic partners Anneli at Dentsu Aegis and Yvonne at Pinsent Mason for hosting these valuable meetings with the fintech community.

Prior to this, we had the opportunity to share some of the fintech developments with Government Minister Kate Forbes at Scottish Parliament, who takes a keen interest in the fintech innovation.

The meeting gave us the opportunity to mark the fact that the Scottish fintech community is now over one hundred innovative firms in Scotland.

Fantastic to have some of the newer fintech firms Xpand Access, CU Apps, Womens Coin, Money Matix, Zortrex join us for fabulous session at Parliament along with the fast growing team from Amiqus.

Later that week I really enjoyed catching up with James Gumble to hear about the terrific innovation development by the Xpand Access team, playing a huge role in demonstrating the value of innovation and collaboration.

Another wonderful example of this is from the team at Soar who have recently won the Scottish Edge award, big congratulations to entrepreneurial Andrew Duncan and colleagues.

Similarly, with my catch up on Tuesday with the terrific Rab Campbell of Wallet Services as we plotted how to extend the entrepreneurial action across a range of collaboration initiatives. Thanks for the much need almond biscuit Rab!!

Action Packed Collaboration

The action packed collaboration was very much alive with the fintech community and a diverse range of participants at the European Innovation and Technology event at University of Edinburgh this week.

Brilliant action sessions as always from exciting entrepreneurs Loral from Sustainably and Phil Gillespie.

This was alongside hearing from the engaging Kate of Sainsbury Bank, David from Lloyds Bank and Anurag of Baillie Gifford on their approach to fintech collaboration.

Also joined by Damien from University of Edinburgh to share insights on the crucial role of academia as part of team Scotland in developing fintech.

Great to work with our European colleagues Fergie Miller in delivering the event to a full house and super enthusiastic audience.

This European collaboration also came alive when we hosted a fintech day with fifty executives from the large French bank, Banque Populaire a week or so ago expertly organised by Mickael.

Terrific sessions in sharing their innovations from James of The ID Co, Chris from Nexves, Jim of Renovite and Laura from Amiqus.

Many thanks also to Mark Curran of CYBG for joining us as well to share the fast moving open banking developments with our French friends.

Earlier this week, we were delighted to work with Kevin and the SDI team and Erin Ellis and the World Congress Team in hosting a trade mission of seven fintech firms from Toronto.

Wonderful to hear from the exciting Canadian entrepreneurs and their interest in working in Scotland and becoming part of our vibrant community

It was great to bring them together with some of the Scottish community such as entrepreneurs Bryan Eldridge of Qwallets and Nick Jones of Blockstar at an engaging session with Simon and the IBM team.

This was followed by a super reception at Bute House, home of the First Minister, hosted by Minister Jamie Hepburn.

Global collaboration opportunities are stretching far and wide. It was brilliant to meet up with the inspiring Radoslaw Szmit and Kamil Kwecka of CShark Ventures to discuss the mutual opportunities in Scotland building on their great expertise from Europe.

Thank you also to Kent Mackenzie for inviting me to share the fintech collaboration opportunities with the Deloitte Global Digital Council members recently, great to have the engagement and support.

The global interest in Scotland is certainly growing and it was great to meet with Martin Rueda from fast expanding London fintech firm Iwoca recently and share how the Scottish community is developing.

This was also the discussion with Avere Hill of Singapore fintech firm Cynopsis as well as Andrus Alber, the founder of Bankish from Estonia, both of whom we look forward to seeing in Scotland very soon

Similarly, when meeting up with Consul General Andrew Jackson from the UAE Embassy this week to discuss the potential international trade opportunities for Scottish firms building on the success of firms such as Qpal and IceFlo in this region

Thank you to Hamira Khan and Grace Glass for setting up.

The global opportunity was one of the key themes for the event at Scottish Parliament earlier this week on the plans for the exciting new Scottish Stock Exchange

Always inspiring to hear from Tomas Carruthers who is leading the initiative and also meet up with team making Project Heather come alive such as Edwin Hamilton, Michelle Thomson and Martha Walsh.

The event was also valuable in catching up with some key friends from across the broader ecosystem in Scotland including David Clarke of SIFI and Frazer Lang of SABE as well as media guru Terry Murden of Daily Business

Action Packed People Events

Events with action packed people has certainly been a major theme this last fortnight.

For example, thank you to Nicola Anderson who expertly took the platform recently for FinTech Scotland at the recent SFE event on cyber security

Another example was the impressive Digital Scotland conference in Glasgow a few weeks ago and it was a privilege to be invited to participate on the stage with so many brilliant speakers.

I really enjoyed our afternoon session with the awesome Cat Leaver of Brand Scotland and fabulous Melinda Matthews of CodeClan along with the wise heads of Gerry McCusker and Donald McLaughlin.

Thank you to expert leadership chairing by Alisdair Gunn and super engagement by Hamish Miller, Will Peakin and the super Future Scot team

This carried on to the weekend when I was asked to contribute to the Executive Women Leadership Programme at University of Edinburgh with the fabulous Maeve Gillies and Jacqui Gale on Saturday.

Thank you to the wonderful Judy Wagner and Susan Murphy for the opportunity to join many great leaders such as Sam Bedford, Clare Carswell and Ailsa Sutherland amongst many others.

On the subject of people inspiration, it was terrific to meet up with the brilliant Dr Susie Mitchel and Laura Bell who are leading on the CanDo Innovation Summit plans for Glasgow later this year.

We are delighted to be involved with the Future of FinTech session which will showcase a number of people from across Scotland leading on financial innovation.

This is something I shared with the brilliant chair of FinTech Scotland, David Fergusson this week as we talked about the plans for the coming months and longer. I always value the insight feedback from these sessions with David.

Last week I had the pleasure of sharing the progress of the fintech innovation being driven by a diversity of people in Scotland with Executive Chair Ian Campbell and Bob Martin of Innovate UK.

The engagement with senior figures from across financial services is so important to FinTech Scotland taking forward its plans and it was excellent as always to have a catch up with Philip Grant and of Lloyds and Colin Halpin of HSBC this week.

Action Packed Innovation

On Wednesday I very much enjoyed meeting up with the brilliant Kristen Bennie to hear about the action pack innovation with fintech community across RBS.

We are delighted we will be working more closely with Kristen and the team on this in connecting with the innovative activity across Scotland and wider.

Another example of driving this action packed innovation is the plans with Sopra Steria and University of Edinburgh to develop a new fintech accelerator programme.

Very much value the great ongoing strategic support of Craig Wilson and Rob McElry from Sopra Steria on this

This last couple of weeks has seen a number of strategic meetings with organisations looking to support and engage with the breadth of fintech innovation across Scotland.

For example, we very much enjoyed the conversation with Alex Foster, Michael Woodman, Daniel Thomas at BT on the mutual innovation opportunities.

Thank you, Craig Muirhead, for arranging and we are looking forward to progressing your relationship with the fintech community

Similarly, great to catch up this week with Kevin Spence and Gary Fegan to consider potential strategic innovation actions we can work on together with Fujitsu.

Action Packed Running

Action packed running has also been a theme over this last couple of weeks after the Edinburgh marathon.

This has included a challenging trail race in Denny near Falkirk on a Thursday evening as well as a fabulous 10km race at Kirkintilloch on a perfect summer evening this week.

Both of which have helped me up my pace along with my fastest Parkrun race of the year last Saturday!!

All of which I am hoping will produce a faster marathon time in July when this race comes along in a few weeks time.

In the meantime, it is the Glasgow 10km race on Sunday through the glorious city which is always so special and a father’s days treat for me! People certainly do make Glasgow. Until Next time!

Keeping up with digital lending in 2019-2020

Photo by Philip Veater on Unsplash

Blog written by Vit Arnautov  – Chief Product Officer at TurnKey Lender

Customers become more and more demanding. Especially as millennials become a bigger fraction of the financial products’ users, businesses should be prepared to work for their loyalty. The onboarding process for getting a new vendor of anything gets so easy that lenders can’t stay still. There are market trends no one can ignore and here are the ones lenders worldwide should take into account.

AI and machine learning

For lending niche, artificial intelligence and machine learning aren’t just hype words anymore. Neural networks are the real deal and lending businesses globally already use them to make credit decisions faster and more accurately. Adobe has carried out a research in which makes it clear that over 20% of financial services companies are already using artificial intelligence to streamline their business processes with 41% planning to use it in the nearest future.

One might think that both AI and machine learning sound like the most expensive technological solutions you can get for your lending business because of their complexity. But software vendors are often the first to adjust to the trends and there already are ready-made LAAS (lending as a service) platforms that utilize custom-tailored algorithms and AI for decision automation and almost instant credit scoring.

Blockchain

It’s a real pity, that this tech got so deeply connected just with cryptocurrencies in many people’s heads. But FinTech industries never perceived blockchain so one-sidedly. For them, it really does grant a more secure way to store and operate data. So businesses will keep on developing new ways to use this tech. The truth is that the vast majority of digital lending is still reliant on old-school relational databases. Putting that same data on distributed ledgers of blockchain will often mean much stronger security. At the same time, this can increase operational costs for bigger businesses.

There’s no doubt that in 2019 blockchain will be implemented in many more financial services and products. But it doesn’t mean that everyone should use it because this really isn’t always the right choice. So before you choose blockchain for your company, consult with experts on whether it’s the right way for you. Overall, now that the crazy bitcoin hype is gone, I think we’ll be seeing a lot more seasoned and rational use of blockchain. Which will, in turn, bring way better results.

Alternative lending to keep growing

During the rise of the sharing economy, it’s only logical that alternative, or peer-to-peer, lending will be gaining more traction.

Image source: Morgan Stanley

Even though some bigger banks worldwide try to adjust and reach the underserved demographics, alternative lending firms still tend to do it better. Often, because they adjust to the market quicker and many clients don’t have a credit score that would let them get a loan from a big bank. At the same time, we have investors who are actively looking for attractive yield-generating ways to make their money work. So the trend looks up for P2P lending in the years to come. But the Achilles’ heel of the smaller alternative lending companies continues to be regulatory compliance. Which brings me to my next point.

Regulations

The continuous rise of regtech

Just as the digital lending niche grows, the number of regulations does too with new notices from regulating bodies published every day. Regulations are scary even for the big players, even though they often have whole dedicated departments working on compliance. In 2019 the trend will continue with governments taking a closer look at the FinTech in general and lending in particular. The problem is that small and midsize businesses often don’t have the budgets to have a compliance staff. And all of this would be quite depressing for the people eager to enter the lending market if it wasn’t for the developments in the RegTech sphere.

RegTech, as a separate branch of FinTech, will be of special interest to lenders in 2019 since these solutions will be the ones to both save the businesses operational costs and protect them from the enormous fines that may hit at any moment.

New regulatory sandboxes

At the same time, there’s hope for more regulatory sandboxes to arise in 2019. For example, Norway wants to open up to FinTech innovation by means of a sandbox, about which I’m sure local entrepreneurs can’t be happy enough. As more tier-1 legislations test this approach to innovative tech, more join in. So in 2019, we can keep our fingers crossed and wait for a regulatory sandbox snowball effect freeing FinTech entrepreneurs of the need to think about compliance at least for a little while.

PSD2 directive in full effect

Europe is a huge lending market. And in 2019 the long-anticipated PSD2 directive is supposed to take full effect. For those out of context, PSD2 is a directive that works across the EU and it’s aimed at increasing financial competition for conventional banks through lowering entry barriers into the field. At the same time, it will dictate the usage of reliable identification systems and strengthened data protection. The main point though is that now customers will be able to use services of third-party financial services company through their bank, through an obligatory open API.

Focus on millennials

Even though baby boomers still hold the largest capitals, millennials are quickly becoming a bigger demographic in terms of using the financial services. In addition, they are more likely to switch to a new lender or choose a digital P2P lender as their first one for that matter. So companies in 2019 will keep their focus on younger audiences by means of creating better products, interfaces, and offers.

Striving for financial inclusion

The trend of trying to serve the unbanked or underbanked regions and demographics will continue. While that’s an important mission on its own, it’s also dictated by the fact that customer acquisition cost in developed countries is getting higher and the competition stronger. At the same time, there are billions of people without proper access to financial instruments. So in the years to come it’s reasonable to expect businesses actively working to reach new locations and demographics with lending products.

Digital only lending companies

Even with today’s state of technology, it seems very unnecessary to go to a brick-and-mortar branch to get a loan. The future of lending is without a doubt digital and there is plenty of companies proving it on their example. In 2019 the trend will continue with businesses creating personalized flows and experiences for online borrowers.

Final thoughts

In terms of technology, it’s now easier than ever to get into the lending business. Barriers are low, good lending solutions have all the needed functionality out of the box. And this is a big reason why overall, the competition in the lending field will continue to grow. New businesses join the race all the time and win users over by offering better interfaces, faster processing, more personal support and of course better interest rates. As a result, users are getting more demanding. On a high-level everything that’s going on is great everyone involved: for the industry, for the borrower, and for the lenders.