P2P Lending — The Bank And Credit Union Way

I’ve often thought that banks could easily squash P2P “lenders” like Prosper and Lending Club by creating an online lending marketplace of their own. In addition to the organic traffic they could drive to the site, they could refer loans they decide to pass on themselves, and give the option to investors/savers looking for higher rates of return than they’d get with CDs to lend money in the marketplace.

Lending Club charges a processing fee ranging from 2.25% to 4.5% of the loan amount, and hits investors with a service charge of 1% of each payment received from a borrower. Seems to me that banks could easily underprice that.

But there’s another P2P lending opportunity for banks and credit unions to capitalize on.

Do you know how much money is lent between family, friends, and acquaintances? I doubt that you do, because, as far as I know, Aite Group is the only firm to have estimated the volume of P2P transactions that occur in the US.

We’ve estimated that US consumers borrow (and presumably, repay) nearly $75 billion from each other (and not from financial institutions or other types of businesses, legal or otherwise) each year. On average, every household in the US makes two loan payments to other people for money they’ve borrowed.

That last number is actually pretty useless, since a large percentage of households don’t make any P2P transactions for the purpose of repaying loans. But in our research on consumers who use alternative financial services (e.g.,  payday loans, check cashing services, etc.), borrowing from family and friends is the second most popular source of funds (after overdrawing on their checking accounts, which might not count).

In fact, of the alternative financial services customers that Aite Group surveyed, one in four borrowed from family or friends three or more times in 2010, and more than one-third did so more often in2010 than they did in 2009.

This is a huge P2P payment opportunity for banks. Note that I didn’t say it was a P2P lending opportunity.

How are these loans and agreements documented? I have no idea, but my bet is that in many cases they’re not documented at all. After all, among friends, verbal agreement is just fine, right?

But if there was a cheap (i.e., free) and convenient way to capture the details of that loan, and a way to actually transfer the money between participants — cheaply and conveniently — don’t you think a lot of people would use it?

The money in the P2P lending space for banks isn’t from loan processing fees or from taking a cut on the interest rates. The money is in the movement of funds.

To date, banks, as a whole, have floundered with their P2P payment offerings. CashEdge and Zashpay have gained some traction, but have hardly become household names. PayPal is a household name, but the vast majority of their business isn’t P2P.

Why haven’t P2P payments taken off?

Banks are marketing it all wrong. They’re pitching the “electronic” aspect. Big deal. People don’t care about channels and methods. They simply care about what’s the most convenient thing to do when they want to do it.

Instead, banks should be marketing convenient alternatives to transacting certain types of P2P payments — repaying loans to other people being one type.

Banks could provide an online capability for the parties to document the terms of the agreement, establish repayment parameters, and enable either the automatic or manual transfer of funds. All for the low fee of a P2P transaction, and not a cut on the loan. No future disagreements about the terms of the agreement, and proof of payment.

In addition to improve the way existing customers transact P2P loans between family/friends, this approach might help attract un- and under-banked consumers who could fund an account that could either be a savings account or take the form of a prepaid card account. 

The real winner, though, will be P2P payments. By driving trial of the service, consumers may find it convenient for other use cases. 


9 thoughts on “P2P Lending — The Bank And Credit Union Way

  1. Let’s use big words: for Banks thinking in P2P terms would require a paradigm shift!

    Banks have developed a notion of their business as a one-to-one relationship with each of their customers. They can only interact through personal or shared accounts with clearly identified customers, and any interaction other than that is cloaked under the term ‘bank secrecy’. I think that without a strong redefinition of their culture, they would only be able to offer products that would look alike P2P from the outside, but will definitely not taste like it from the inside, when every single transaction will have to go through their idiosyncratic internal processes.

    I can’t imagine being able to borrow money, only from close friends that would be customers from the same bank than me 🙂

  2. FB: I must not have been clear. I couldn’t agree w/ you more that real P2P lending is a huge paradigm shift for banks. But the opportunity I’m trying to paint doesn’t come from the lending part of the equation, but from the payment part. And there’s absolutely no need for both parties to customers of the same bank.

  3. My understanding is that you were speaking – among other possibilities – of things like repayable advances from many to one (which I called borrowing from friends). I agree that it is more traditional payment than traditional lending (even if p2p lending is already an hybrid with its repayments from one to many). But I still think that it will be foreign for bankers to see a “regular relationship”, consisting of several payments coming from an external bank account, where no KYC would have been done. I’m mixing here cultural and regulatory elements, but this is also a mix of all this that is deeply ingrained within current standard internal processes. Plus, I think that it will be a nightmare to try fitting the low fee of the P2P repayments into the existing fee structure (checking account’s and interbank), hence my prediction of a service offered only between customers of the same bank: definitely a lame product.

    I would love for one to see a lot of P2P in the banking industry, but I’m not sure that traditional banks will be able to deliver something like this any time soon.

  4. Hey Ron, I’ve just noticed that comments are qualified as “thoughts on your post” – does having submitted 2 thoughts make me a Thought Leader? 😉

  5. May be true, but even if so, then banks are too slow to catch onto this and market it properly. Depending on market there might also be legal hurdles hindering the banks to give assistance in formalizing those loans.
    Several startups in the US are offering help in organizing family and friend loans.
    Mostly they offer
    – documentation and prepared legal contracts
    – advise
    – calculation assistance (e.g. repayment plans)
    Most of them do not offer assistance with the actual payments.

    Again depending on market it is questionable if the lender & borrower really need assistance in setting up the payments.
    In many markets reoccuring direct debits or reoccuring direct transfers can be set up with a mouse click in online banking.
    So the assistance is not needed if everythings goes as it should but rather if borrower is unwilling or unable to pay and stops paying.

    Claus Lehmann

  6. Pingback: Roundup of Social Lending News – August 6, 2011

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