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Banks lend money. Taxis take people from one speed to another. You can’t even imagine that there is a lot of similarity between the two. But both are based on a simple enough premise. Both have managed to create an uncontested and credible status quo. Both are facing a challenge to their dominance and both are resisting or (at best) slowly adapting to changing times.
As Albert Einstein said, ‘Everything should be made as simple as possible, but not simpler.’ But what is 21st century simple? In the world of people transportation, Uber has come up with an answer. It has entered the modern world and understood the psyche of the modern man and in the process has shaken up the status quo. But what about the banking sector and bank lending in particular? In several hundred years of business surely banks have had the time to develop a product that is as simple as that? But is the 21st century that simple and if not, where does this leave the banking sector and traditional lending?
Everyone is familiar with the likes of Barclays, HSBC, Lloyds or Santander and this is because they are banking giants – a veritable banking cartel – who dominate the lending landscape by the size of their market share. They don’t need to innovate or be overly accommodating or flexible. They have a set criteria and certain requirements – boxes that their customers have to tick before they will be considered for lending.
By virtue of their size they are volume businesses based on vanilla deal types fueled by a methodical and transactional approach that has served them well over the decades. The result of this approach is that they manage their risk well and hence can lend at very attractive rates.
But as the 21st century business world continues to evolve, the risks are changing. It’s a pace of change that traditional bank risk appetite isn’t necessarily keeping up with. Sometimes all the risk modeling and financial sensitivity analysis in the world can’t answer the question; Do I approve of this person, their business, and their plan?
The Am I question related to this person, their business and their plan is more relevant than ever.
We are now entering the world of the dragon and it is in his lair where business now finds its finances. In the recent past it was an exclusive world inaccessible to most businesses. But now it is evolving and entering the mainstream under the guise of peer-to-peer lending.
With interest rates low and yields low, many private investors and hedge funds are starting to pour billions into peer-to-peer and independent lenders. You and I can sit in that comfy leather chair and look at the metaphorical whites of a person’s eyes and make a visceral judgment on them and thus decide the fate of their dreams – it’s a power Which is usually reserved for the ultra-wealthy… or TV personalities.
But the allure of being an armchair dragon, the potential for higher returns for the investor and faster, more convenient loans for borrowers means the sector is set to grow and in the process begin to shape the lending landscape.
But let us bring some context to things. In the current market, peer-to-peer lending to SMEs still accounts for less than 1% of total lending. However, the number of new entrants in the market is increasing and the amount of money lent is increasing rapidly. It has captured the imagination of all wannabe dragons. But more importantly, it has attracted the attention of large funds with large amounts of money to invest – enough money to ensure that the investment is not speculative and that failure is not an option.
Peer to Peer and Uber are here to stay – get on board or take a black cab ride back in the last century.
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