The financial services industry has seen a recovery of sorts in the last couple of years. The housing market is picking up and the performance of Lloyds and RBS has lead to speculation about the Government selling its stake, but the real growth area in (in percentage terms) is in peer-to-peer lending – sometimes referred to as crowdfunding.
The sector is concerned with providing consumer and commercial loans through online platforms, with the funding almost exclusively coming from individuals, not the markets or private funds. In 2013, the market grew by over 120% to £838m. It will do at least the same again in 2014.
Understandably, there has been an explosion in firms looking to break into the market. Within a couple of years, multiple new entrants have emerged, two trade bodies have emerged in the UK, specialist software firms have been established, and there’s more open data available in this market than in many more seasoned sectors. Names like Zopa, Ratesetter, Funding Circle, ThinCats, and rebuildingsociety.com are now featuring regularly in the national press and the sector is building an ever stronger awareness.
From April this year, operating an electronic platform for lending money is set to become an FCA-regulated activity, and the scramble for permissions to operate in the market is hotting up.
Impact on the strategy of FS providers
For some it will make little difference. The investment in time to guarantee the success of a new platform might be seen as too much of a deviation on a sound strategy. It’s also such a fast moving and innovative sector that it can be daunting for businesses that are not traditionally fast movers.
Others see it differently and are capitalising on the relative ease of securing an interim permission – at present a consumer credit license from the OFT and a submission to the FCA are the minimum requirements – to give themselves the opportunity of operating in the market for two years before full authorisation is required.
This is appealing to entrepreneurial businesses looking to establish new markets or join fast-moving sectors like peer-to-peer lending. It is also attracting traditional financial services providers who can see a diversification opportunity.
Driven by the consumer
Why would an established lending business that’s content with its funding strategy consider entering peer-to-peer? As with many changes in business, it is driven by consumer behaviour. We’re time-poor, trained to shop around for the best deal and increasingly open to change in financial services. Organisations that can meet these needs will quickly gather market share. Of course, the qualities that initially attract business can also make retaining business difficult.
However, it is reasonable to assume that several organisations will tackle customer retention by embracing the speed of technological change and continuing to innovate and provide an engaging brand experience and the best value service.
Cutting out the middlemen
The banks’ monopoly on payment technology is coming to an end, and the rest of the world is catching up with advances in mobile phone payments from Africa. There will soon be even more ways to access, manage and invest your money, almost exclusively through secure online connections and with a huge focus on mobile technology.
All this means less of a role for the middlemen and lower costs to the consumer. Traditional financial services firms might find their margins make them uncompetitive (as is already happening with high street bank savings and borrowing products) – so survival becomes a strategic aim, rather than just a nice-to-have sideline.
A true disruptor
Predicting the pace of change has always been difficult, but in the age of technology, it’s nigh on impossible. Peer to peer lending is using a combination of new technology and changing consumer attitudes to create genuine disruption in financial services.