How banks can respond to the peer-to-peer revolution

Consumers are facing something of a perfect financial storm.

Fuelled by inflation and compounded by rising interest rates, the cost-of-living crisis is hampering people’s ability to service debt at a time when many will need to borrow more to make ends meet. A trend that inevitably will lead banks to tighten their lending boundaries.

Although studies are emerging that indicate the number of people falling into their overdraft is not as bad as expected, the industry believes that household finances are currently being buffered for some by savings accumulated during the pandemic. Therefore, are we likely to see the impact of the cost-of-living crisis deepening, as these ‘nest eggs’ deplete over time?

According to a study by Ipsos, one in four UK consumers are already using credit cards for essential purchases while almost one in five have borrowed more money. Amid this backdrop, we also expect consumers to continue turning to different ways of borrowing money in the form of peer-to-peer (P2P) lending.

According to a recent report by Acumen Research and Consulting, the digital P2P lending market size - whereby loans are made through an online platform connecting borrowers directly with lenders - is expected to touch USD 804.2 Billion by 2030. There’s also a more informal peer-to-peer element, from subbing your friend £10 to buy lunch to lending a relative £5,000 to help them buy a car.

P2P lending is often simple, quick, flexible and painless – all traits which many brands would agree will help to constitute a positive customer experience.

Why is P2P lending gaining traction?

Amid a turbulent financial backdrop, P2P could be perceived as a safer and more accessible way to manage small transactions with far fewer loops to jump through, when in the hands of trusted parties.

Other factors fueling this growth include a general distrust in traditional banking competencies, along with the rising adoption of digital platforms and increasing demand for alternative lending options.

Meanwhile, a general lack of financial literacy and awareness of credit scores is causing unease among consumers and prompting them to make suboptimal decisions. A study of the UK and several European nations found that of the consumers who have been denied credit since March 2020, more than half (52%) said they thought they had a good credit score and were surprised to be turned down. One in two turned to the likes of payday and short-term loans.

Tellingly, 64% of those turned down reported receiving no assistance from their lender on how to improve their chances of getting approved.

Traditional financial services players need to take note

Companies like Loop, which was recently acquired by Tandem bank, are making P2P an even more accessible and structured option, allowing customers to borrow from, and lend to, friends and family while setting up reminders for people to pay back.

Loop is an example of an app that aims to transform the informal money-sharing market and eliminate the social stigma surrounding it. By doing so, it empowers users to sidestep costly bank overdraft fees. As a result, Loop could pose a challenge to conventional banks. Disruptors such as these are adding credibility to P2P lending by partially formalising the processes involved.

While banks themselves may not yet offer P2P services, they do need to be aware of the rising trend and how it could lead to a contraction of lending and increased problems among their customer base.

Keeping track of customers’ informal lending activity is an impossible task. However, banks do have the power to better leverage customer data to identify patterns and thus provide support by educating the customer on how to manage their finances.

The P2P lending market is still something of a ‘wild west’, remaining hard to regulate in some cases. Because of its nascency, consumers will need support and education to guide them through borrowing (or lending) decisions of differing sizes.

The key for banks and other financial providers is to build trust and implement what makes P2P so popular - convenience, speed, simplicity and flexibility - within customer experiences that focus on education and improved service.

While banks cannot control how customers spend their money, many banks provide their customers with the option to obtain advice on how to manage their funds, whether through online resources, phone support, or in-person consultations with a financial advisor. This option of advice is particularly important during volatile times of high-interest rates. Although the level and quality of financial advice offered by banks can vary widely, speaking to an advisor when needed will have a positive impact on building trust among the vast majority of consumers.

Despite the UK narrowly avoiding a recession, worryingly, less than half of UK consumers trust their bank to help them manage their finances through one – offering human-to-human advice on the likes of informal lending would be a wise place to start.

Guiding borrowing

With anxiety around finances rising amid the ongoing (and what could be prolonged) cost of living crisis, consumers will likely need to borrow more to make ends meet. However, with banks and other traditional lenders also likely to tighten their lending criteria, people in need of a loan could turn towards P2P.

Banks need to take note of how and why this is happening. Those that do so and respond in kind will be better placed to serve their customers through what is set to be a difficult time to come.