In the very early stages of the AltFi revolution, there was a great deal of speculation about how its rise would affect the banking sector. As P2P Lending moved in and started filling funding gaps left by the traditional finance industry, it sparked questions about banks’ lending models. Could P2P Lending and other Alternative Finance platforms eventually provide a solution to replace all banking services? As Bill Gates famously once commentated, “banking is necessary, banks are not”.
As the AltFi industry starts to mature the conversation seems to be changing from one of direct competition between AltFi platforms and banks to one of co-operation and partnerships. Perhaps the scale and customer relationships a bank enjoys can complement the efficiency and agility of an online lender?
The partnerships between banks and P2P Lenders to date have been driven in part by government legislation requiring banks to refer any borrower they turn down for a loan to an ‘alternative lender’. For example, the Funding Circle and Santander partnership agreement to refer SME borrowers who don’t meet the bank’s lending criteria. Partnerships have also been formed to introduce money onto P2P platforms like the one between Metro Bank and Zopa for investment in their consumer loans. The flow of money from banks onto P2P platforms will also be aided by the rise in the number of listed funds that are coming to market investing directly into loans.
Banks face an on-going problem, the problem that left the door open for P2P in the first place, and that’s capital rules. Banks are heavily regulated and because they lend from their balance sheets they have to keep a certain amount of capital on their books to cover the eventuality of bad loans. This is not something that affects P2P lenders since they operate platforms that match borrowers and lenders, allowing them to grow their ‘loan books’ without the need for additional capital. Before the 2008 crisis, banks became over leveraged and exposed to bad debt, which has led regulators to increase capital requirements, making it harder for banks to take on risk. These changes have opened up an opportunity for banks and P2P platforms to start to work together, with P2P platforms allowing banks to get exposure to the lower leveraged loans, allowing investment funds and more risk aggressive investors to come in and take the top slice.
Proplend is a P2P Lending platform specialising in loans secured against UK commercial property. Each loan is split in up to three Loan to Value based tranches making it ideal for investors with different risk and return requirements to all come together in one loan investment.
- Tranche A – 0 to 50% LTV
- Tranche B – 51% to 65% LTV
- Tranche C – 66% to 75% LTV
Proplend can work with banks looking to deleverage their loan books, taking whole commercial property loans and leaving them invested in Tranche A only.