Banks Building Partnerships with Peer Lenders
The peer-to-peer (P2P) lending industry has come a long way from its humble origins in the early 2000s. With a process that simplifies loans and provides access for a much wider range of borrowers, P2P lenders have been taking customers from larger, less agile banks. However, as these lenders mature and grow, they have been turning to these very financial institutions to continue to expand and sustain their growth.
Today, there are several agreements between P2P lenders and major banks. These range from simple referrals to more complex associations and even direct investments on the part of banks. While some might bemoan the interference of the same institutions the industry seeks to avoid, this newfound cooperation has been and can be incredibly advantageous for consumers and businesses alike.
Several banks, including giants such as Citigroup, Santander, and Royal Bank of Scotland have all created relationships with major P2P lenders such as LendingClub and Funding Circle. While these partnerships usually differ, some have included the use of bank funds to serve loans and provide cash injections for operations. This interconnection is a strong sign of the industry maturing and could help it move further into the mainstream as the regulatory framework evolves to protect consumers.
P2P Lending Grows Up
P2P lending has grown exponentially over the past decade, going from a small niche of the financial tech industry to a multibillion-dollar business. As it has expanded, the industry has recognized the need for regulation and legitimization that can give P2P lending a place at the financial table. As such, several lenders have entered agreements with major banks and financial institutions. The goal is twofold: to leverage the marketing tools and infrastructure of established financial institutions, and gain the financial backing of these banks.
While partnerships between these lenders and banks have existed for quite some time—LendingClub has had several alliances with banks starting in 2007—the financial side of these associations has recently come into much clearer focus. Today, banks have taken on a larger role, slowly entering the industry to the benefit of themselves and independent lenders.
One of the biggest lenders to take advantage of this new interconnectedness is LendingClub. The company, which accounts for $7.6 billion in loans each year, has created partnerships with several banks for almost a decade now. These agreements include lead sharing, referrals, loan purchasing, and in some cases cash injections to help operations. In a recent estimate, LendingClub calculated that banks account for approximately one third of the capital used in the company’s loans—either by purchasing the loans or directly injecting funds.
Other lenders have made similar deals to keep up with the industry. In Europe, lenders such as Funding Circle and Zopa have arrangements with major banks such as Royal Bank of Scotland, Santander, and Metro Bank. Prosper, the second-largest online lender by assets, announced it had received a $160 million cash injection from a group of banks that included Credit Suisse, JPMorgan, and BBVA.
What it Means for Consumers
While there is a concern that bank involvement will work against the transparency the industry needs, there are several benefits that are transferred directly to consumers. For one, by having a steady capital cushion, lenders can operate more reliably and continue expanding to broaden their reach. It also means that bank customers now have a more direct path to getting the funding they need, even if it does not come directly from the bank. This is especially useful for consumers with credit that might be less than perfect.
Overall, the current wave of partnerships and strategic alliances could prove to be a boon for the P2P industry and consumers alike. By working with more mainstream financial institutions, lenders gain added legitimacy and stability while bankers benefit from more avenues to retain and attract customers. Consumers will benefit from more transparency, easier processes, and boutique attention accompanied by access to institutional support.
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