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Can peer-to-peer (P2P) reduce the relevance of traditional financial services providers?

Posted by Dave Uhryniak, Financial Services research leader, Deloitte Services LP, on October 15, 2013

Can growing consumer acceptance of P2P financial services potentially reduce the relevance of traditional financial services providers? The wider acceptance has shifted P2P financial services from fringe to legitimate consumer options and institutional investment plays. The services present differentiated competition and can potentially move traditional providers into the background of financial transactions. Traditional financial providers may be able to respond to the P2P challenges by delivering value-added services developed through effective technology use and cross-industry partnership.

Legitimate options for consumers and investors

P2P financial services are offered around the globe and have grown to encompass multiple loan categories, payments and certain types of insurance. Consumer adoption continues to accelerate. Consider P2P lending in the USA: Since 2008, origination volumes have almost doubled each year and will likely total close to $2.3 billion this year.1 P2P payment providers also continue to expand. The most notable entrant into the space is Google, which began offering P2P payment capabilities in early 2013 and will compete with industry leader PayPal.2

Consumers are not alone in recognizing the benefits of P2P services, as investors now recognize the opportunities. Institutional investors are increasingly making portfolio allocations to P2P loans. For example, some wealth advisors view investing in P2P loans as an alternative to high yield corporate bonds and have allocated client assets to the category.3 Private equity firms have also noticed the opportunity in P2P lenders. During the past year, Prosper and Lending Club have received equity investments from investors such as Kleiner Perkins and Sequoia Capital, as well as a group led by Google.4 Further, a secondary market has developed to facilitate trading of P2P loans.5 Though the nascent secondary market is still developing, it signals interest among investors.

Differentiated competitive position enables control of consumer interface

P2P financial services differentiate from traditional providers in two ways: methods of product delivery and costs. P2P providers function as facilitators that connect people who want to engage in financial transactions. In this role, processes are more streamlined. Loan fulfillment illustrates the point: A recent article cited the example of one borrower who stated that their loan approval came minutes after the application was submitted.6 In turn, the efficiency of such P2P operations shows how consumer costs can be lower. A P2P lender spends, on average, one-third of what a bank spends on operations and marketing.7 Lower costs can likewise be found in other sectors: For instance, a P2P insurance customer spends half as much as they would with a traditional insurer.8

Not only do P2P providers have lower expenses, they also control the customer interface. Traditional providers face the risk of getting “dumb piped”, or moved into the role of enablers. For example, the P2P insurance model positions insurance providers as options which users themselves select.9 A similar situation exists in payments. For example, both PayPal and Google Wallet can draw funds directly from a checking account. The interface is with the payment facilitator, not the bank. Both examples demonstrate how a traditional FSI loses its direct connection with the ultimate customer and is therefore pushed into the “pipe” role. The value lost can be measured in terms perhaps greater than the lost customer-contact capabilities. To illustrate, consider internet search engines. Google is widely popular with consumers and requires an internet connection. However, the equity market capitalization of Google is $294.4 billion, while internet connection providers have market capitalizations only half that size.10 The market valuation difference potentially indicates it is better to be the consumer interface than the pipes.

Can traditional institutions rise to the P2P challenge?

The P2P challenge is likely to require leveraging technology to develop value-added offerings, such as personalized services and rewards for certain actions. Predictive analytics and gamification may be utilized to develop the value-added offerings. Predictive analytics could potentially enable a personalized customer experience, which may include next-best-offer/next-best-action capabilities. Gamification that provides rewards and incentives could also increase consumer loyalty. For example, BBVA Compass uses gamification to incentivize checking customers to use services such as electronic bill pay.11 Technology is becoming an increasingly larger part of financial services and when embraced by traditional providers, could potentially yield positive results.

Traditional providers might consider aligning with industry leaders and technology innovators. For example, US Bancorp is collaborating with payments industry leader, Western Union, to provide global P2P payments.12 Acquiring technology companies or establishing joint ventures could help develop innovative products and services, accelerate time to market and reduce the incentive for consumers to seek alternative providers.

In ten years, perhaps peer-to-peer will be the primary channel for routine financial services fulfillment and distribution. Consumer preferences can change as technology develops. Consider, ten years ago social media was not widespread. Today, millions of people find updating social media a daily necessity. The question becomes, is it better to play a role in shaping consumer preferences, or react to them?

1Jeanne Dugan, “As banks retreat, hedge funds smell profit” Wall Street Journal, July 22, 2013 and Deloitte analysis
3Joe Light, “Would you lend money to these people?” Wall Street Journal, April 13, 2012
4Jeanne Dugan, “Consumers find investors eager to make peer-to-peer loans” Wall Street Journal August 6, 2013
6Jeanne Dugan, “Consumers find investors eager to make peer-to-peer loans” Wall Street Journal August 6, 2013
7Roben Farzad, “Peer-to-peer lending: no longer just a curiosity”, Business Week, January 20, 2013
10Market quotes are as of 10/1/13
12“U.S. bank enhances mobile experience with Western Union in first-of-its kind offering," Businesswire, September 17, 2013

As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

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