P2P lending makes it to main street?
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23 January 2015Juan Mazzini
Can old dogs learn new tricks? What about banks? Banks are trying; not only by making interesting bets around digital but also social. On the social aspect of banking, Banco Colpatria in Colombia offers credit cards to individuals using Lenddo's social scoring. Lenddo has created and extensively tested an algorithm that analyzes the connections of people in their social networks to determine their character and willingness to pay. Lenddo is leaving behind its start-up origins as a micro-lender and entering into partnerships with financial institutions to take advantage of this scoring which can extend the traditional loan customer base to include new segments with no credit history (college students for example). In this same line, Banco Galicia in Argentina has a very interesting offering - Galicia MOVE - aimed to college students based on a totally digital proposition, underpinned by the use of digital channels and a targeted marketing strategy. Galicia MOVE includes a savings account, a debit card and a credit card. Jumping into social based propositions is just around the corner for them. Clearly, digital and social are terms that go together and could certainly benefit those banks that want to bet on these. Another look at the same issue is that it seems inevitable that banks begin to incorporate business models that otherwise threaten their own business from the periphery. Change or die. Peer to Peer (P2P) lending is one of those situations and banks have started to experiment with it, taking P2P lending to main street. Santander Bank through a lead generation model in partnership with Funding Circle’s and RBS using a 3rd party platform are perhaps the most significant cases right now, but we are aware of more movements in this direction. Banks are certainly not playing hide and seek with P2P lending. In our research, our conversations with key financial industry stakeholders and as collaborators at bringing together banks, fintech start-ups and VCs, P2P lending appeared as an area that banks should explore to attract customers through a different value proposition. P2P lending provides a way for the bank to acquire customers not covered by their traditional offering while making some money in the process and retaining a customer that can eventually move into financial products from traditional banking as their business / financial condition makes them a subject fit for bank credit. Regulation is an important issue for banks to get into P2P lending and depending the country, there may be restrictions. Perhaps the P2P lending company that has best understood and dealt with this issue so far is Afluenta; working with regulators in each country to adapt its model and operate under authorization of the financial regulator. For example in Argentina it was the first P2P lender to operate with the approval of the regulator, under a trust structure where Afluenta administers the trust and the money is out of its estate. Money is owned by lenders (peers), which is in the spirit of the P2P proposition. From my point of view in order for banks not to get trapped between their traditional business model, processes and restrictions imposed by the regulator there are some models that banks can explore before deciding to dive into P2P lending all by themselves: lead generation as Santander, a partnership to use the platform of an existing player or possibly an acquisition of an existing player (as BBVA did with Simple to speed up in the digital race). The end game will have banks incorporating services based on digital and social, leveraged by the use of data. I believe it will have them as main actors, therefor competing directly with the fintech-startups, such as the P2P lending companies. In the meantime, coexistance may be possible. Because I also wanted the view from someone working in the heart of this business I spoke with Alejandro Cosentino, a seasoned financial services executive and founder of Afluenta, who until now remained very skeptical about banks entering into the P2P lending space. Nevertheless he believes in its potential: since launching, Afluenta started to transform personal finances into the greatest and most participating peer-to-peer lending community across Latin America with AR$ 25M, 1300 loans, +90,000 investments transactions and covered +1,000 in social networks, blogs, news and traditional media. Afluenta originates loans at a cost which is 25% of the cost incurred by a bank. In Mexico he believes that loans could have a return of 12% against 3% which is the return for money invested by an individual in a bank. Following some of his impressions, which he gently accepted to share with you and me. P2P lending is first and furthermost a financial business and only then a technological business. Many P2P companies approach it the other way round and that is why they fail. P2P lending has to be played in a (highly) regulated and complex environment where you need to understand what risk management is about. This is why he works on 3 key issues (in order of importance):