Blockchain’s Impact On Marketplace Lending
P2P lending platforms have positioned themselves as an alternative to traditional finance. And yet, they are morphing into banks. Zopa was recently granted a banking licence and others are expected to follow.
Going forward there will be consolidation and convergence with financial institutions. Banks are launching P2P operations, with Goldman Sachs’ Marcus expected to grab market share when it launches in the UK next year. We will doubtless see banks acquiring P2P platforms, swallowing their attractive loan books and integrating their customer franchises.
The truth is, P2P lending isn’t truly peer-to-peer – platforms act as intermediaries, charging a fee to connect counterparties. Despite the promise of disintermediation and democratisation, the main achievement of P2P lending has been to increase the accessibility and speed of lending. Friction has been reduced, but not eliminated. After all, friction is key to the business model – platforms earn fees by intermediating borrowers and lenders. Their raison d’être is to make money, not to save the world.
Enter blockchain. The much hyped, much misunderstood Distributed Leger Technology (DLT) powers Bitcoin and other cryptocurrencies, but it promises so much more. Cryptocurrencies are just one implementation of blockchain, which has much wider applications. For example, smart contracts have the potential to transform every area of society, moving beyond finance to reconfigure healthcare, government and commerce.
Blockchain offers numerous advantages over incumbent marketplace lending technology, including increased security, transparency, cost reduction, scalability and speed. This still nascent technology offers the tantalising prospect of bona fide P2P lending, connecting borrowers and lenders without the need for vetting counterparties, facilitating transactions, account administration and fees. Open-source lending powered by blockchain could transform credit markets, with far-reaching implications for the global macroeconomy.
Like many emerging technologies, there is a wall of mythology surrounding blockchain. Gartner puts it at the “peak of inflated expectations” of its hype cycle curve, and believes it could take another 10 years before reaching mainstream adoption. Meanwhile, money is pouring into the industry, with $1.74bn invested in blockchain ventures to date. Although many start-ups in this space won’t live to fulfil their promise, progress is being made in developing and commercialising the technology. Like the advent of the Internet and electric cars, it will take time to understand blockchain’s significance and determine whether it is a foundational technology that will facilitate change at a societal level, or simply a peripheral innovation, the preserve of programmers and alt-fi aficionados.
Are we looking at the end of P2P as we know it and the birth of a more transparent and democratic marketplace lending model? It’s too early to say, but the arrival of MIFID II in January 2018 is bound to hit platforms hard and cast a shadow over alternative finance, forcing the industry to evolve. Richard Baker, Chairman at Crowdsurfer , believes we are looking at a “survival of the fittest” scenario, with some providers vulnerable to failure. It’s not inconceivable that blockchain could step in and become a viable platform for P2P lending, but this feels unlikely in the short term. Mass adoption depends on getting companies to share data, validating personal identities to create tokenised digital wallets that aggregate accounts, and reducing the economic and environmental costs of operating blockchain technology. In truth, we are nowhere near solving these challenges.
Blockchain needn’t be seen as a threat to P2P lending. In fact, it could be a panacea, allowing platforms to adapt to the new regulatory environment, cut costs, improve efficiency and offer a better customer experience. Before blockchain reaches critical mass and adoption, marketplace lenders have an opportunity to position themselves to benefit, rather than perish in its wake.
This article was created in association with Crowdsurfer, the leading resource for data and news on the crowd economy and alternative finance.