How to get Win-Win-Win in direct online loan
Part 2 – What needs to be done now to get Direct Online Lending (ODL) / Peer to Peer Lending (P2PL) back on track for compliance, profitability and sustainability?
The first in this series of blogs, published on January 26, 2021, looked at “How and why the industry has lost its way”. We considered developing sustainable / profitable business models (not just growth), purchasing systems based on the true useful life of the system, moving away from “recording systems” in favor of “recording systems”. ‘process automation’ and changing dinosaur payment systems that only serve to delay transactions.
All the problems of the past but there is hope, and potentially an industry-wide solution.
P2PL market development
The UK P2P lending market went through various stages of development from 2005 to 2020, including the shift from consumer credit licensing to FCA regulation as subsequently reinforced, the introduction of Innovative Finance ISA, then the institutions becoming more and more involved. With this, the term “Peer-to-Peer” was overtaken by “Marketplace Lending” and later “Online Direct Lending”. The P2PL movement could no longer claim “We do a much better job than the banks!” », While the banks still derive huge profits from their loans and borrowings, and P2PL regularly went to shareholders to finance the losses. Thus, after 15 years, a complete overhaul of the ODL market is expected.
What should happen now?
Ignoring for a moment the inevitable installation costs and the given key cost element of acquiring customers for ODLs, it is clear to me that the main problem in transforming this nascent industry lies in acquiring and using more efficient technology.
In the first instance, the technology was the golden ticket that would enable the “win-win-win” scenario of low cost loans for borrowers, healthy interest rates for lenders and a growing profitable business for the community. P2PL company. However, many P2PL industry leaders have wondered how to correct their business model and the imbalance between commission income and overhead.
However, help is coming in one area, under the guise of Open Banking, wresting control from banks, providing access to data and re-establishing real-time automation of the payment process. This will increase the efficiency and cost-effectiveness of credit risk categorizations and the collection of repayments from borrowers, thus improving very important liquidity.
Basically, the more fees and margin the ODL Company earns on each loan, the more likely it is to be profitable. Having a small team capable of processing a large number of loans, including payments and banking transactions, with efficient software that supports high levels of automation, is a critical step towards profitability.
Now is the time for direct online lending to become profitable and sustainable
From a technological standpoint, I think there has been a commendable concentration of development activity regarding improving the front-end customer experience. Unfortunately, this has come at the expense of automating back office and administrative operations, which probably accounts for around 90% of business processes. Automation in this area has been at the center of our attention. We hope that companies in this industry are now starting to understand what they needed the first time around.
With the increasing borrowing and lending / investment needs in these difficult times, is this the time when the industry is rising to the challenge? Low interest rates and high demand for loans could be the catalyst, once again, to give emerging ODL companies (and traditional lenders looking for a new online sales channel) the ability to provide their online services cost effectively. Or maybe some of the established companies will make the appropriate changes to meet their goal of sustained long-term profitability, through the intelligent application of automation technology.
What is the solution for the sustainable future of direct online lending?
There is no doubt that the kick-off of the nascent P2PL industry was the 2008 financial crisis. Now, ODL must rise to the task to provide lenders and borrowers with the service they need as the world is recovering from the pandemic.
After doing the research and analysis, can the industry now see how ODL could be delivered:
- in a safe, compliant and cost-effective manner for all potential customers, and
- in a profitable and sustainable way for market players?
It is possible, and so it is …
A solid option for reversing the onset of sub-par and loss for individual P2PL / ODL businesses is to look to outsource the technological aspects of the business. Depending on how it is done and with whom, there is the potential for considerable savings in terms of software, personnel and premises costs. However, care must be taken in choosing the technology with the highest level of automation and holistic coverage of requirements. Outsourcing the technology to many vendors for different parts of the overall requirements can add layers of transaction costs that each nibble into the low margins available.
So, the above might be part of a solution for some P2PL / ODL companies, but is there an overall market solution that will benefit all players and stakeholders?
The answer is that a generic online direct lending primary and secondary market is made available to provide lending market facilities, matching retail borrowers and investors under FCA regulations. It will also allow corporate borrowers to issue loans and institutional lenders to sell, refinance or invest in loans. The marketplace will provide the day-to-day presentation, matching, processing and service of loans. Loan requests will be entered individually through the Marketplace website or through an API bulk loan download feature for lenders, brokers and institutions. Most lender funds will be matched automatically with borrower’s loan applications or matched with loans offered in the secondary market. This will allow lenders to focus on their niche lending or brokerage function and not worry about the ongoing processing of loans. It also provides for the mechanism for selling or refinancing loans issued via the secondary market.
This “Market As A Service” will have a pricing structure primarily based on transactions processed for the entire loan life cycle. This approach means that potential businesses can launch ODL and P2P loans without the significant initial technology investment, development and implementation time, or the associated staff and office costs. They would be “in business” typically within three months and with a fee structure based on payment per transaction processed and with profitability already in sight.
This service could also be made available in the form of a “Platform As A Service” with a branded portal for companies and institutions that wish to have their own front-end to the market.
Banks should participate as members of this lending market, perhaps for loans that would be considered inappropriate or unprofitable in their ordinary course. This would be seen as an essential step for banks to become more “FinTechy” themselves. This would certainly benefit their customers, and therefore the bank, by adding customers, liquidity, credibility and confidence to the market as a whole.
This is a feasible next step for the UK ODL market and beyond. The technology and infrastructure are available. Potential stakeholders should share their thoughts and, perhaps, this can be built as a profitable path for the future of P2PL and online direct lending. We believe this benefits the market as a whole, retail, commercial and institutional lenders and borrowers, including banks, existing businesses and new businesses that are setting up. And this cooperative effort will help revive the economy!