According to Roberts Lasovskis at investment platform TWINO, the year ahead is an opportunity to get onboard with the changes happening all around us, embrace regulation, and create solutions that focus on the customers.
Lendy’s collapse in May and FundingSecure in October put a combined £240m of savers’ money at risk, while Funding Circle’s new withdrawal processes have raised investor concern among even the most well-established lenders. But there is light at the end of the tunnel, and the industry can be optimistic for 2020, providing last year’s lessons are learnt.
Firstly, there is one particular aspect of the two peer-to-peer collapses last year that has attracted much of the criticism from both media and investors. Both Lendy and FundingSecure came advertised as ‘approved by the FCA’, yet in collapse, both displayed structural faults and warning signs that should perhaps have been noticed earlier. Managing credit risk is an expensive learning process, but should be taken very seriously, and using as many data sources and as much testing as possible. Inevitably, these high-profile failures will cause a tightening of regulation across the industry. That is a good thing.
The sector should not just tolerate and survive regulation; it must embrace it. Higher levels of scrutiny from administrators lead to better industry structures and more robust business models that generate greater trust from consumers. This is an inevitable step for a maturing industry, and now is the time for peer-to-peer to ensure its regulations are fit for purpose, and that investor money is not put at unnecessary risk.
Higher levels of scrutiny from administrators lead to better industry structures and more robust business models that generate greater trust from consumers.
As well as building consumer trust and engagement in the sector, increased regulation encourages the development of better products. When regulation works well, companies are forced to innovate and adapt to meet the new challenges, eliminating the number of shortcuts or ‘easy options’ that are taken when developing a product for consumers. Ultimately, this creates safer and more sustainable returns for investors.
Beyond regulatory intervention, it is paramount that in 2020 the peer-to-peer industry prioritises transparency – with investors, borrowers and other industry partners. Transparency and clear communication are key to rebuilding trust in the sector, and even in specific products. Take Funding Circle as an example. It is undoubtedly one of the most successful businesses in the sector, and yet has been suffering a recent crisis in trust, which has been largely caused by customers not fully understanding what procedural changes are going to mean for their money.
The changes in question are not necessarily the full problem. The model is no less safe and the business is no less high-profile. Nor do investors automatically object to the idea of a delay before they can access their money (look at fixed-term savings accounts for example). As with all peer to peer lending platforms, it is simply a question of understanding risk – customers misinterpreted the changes as a sign that their money was under threat and understandably rushed to protect it.
As with all communication, and this goes for most industries, the customer must always come first. Fintech itself exploded as a sector in the wake of the 2008 financial crash, as a reaction to bad practices in the financial services industry. New businesses and solutions were developed to fix the shortcomings in finance and financial services, and to pivot them back to a consumer-focus. Many are predicting an economic downturn in the next year or couple of years, following a decade of growth. Fintech businesses emerged from the last downturn by creating solutions that focused on their customers, and should do so again.
Peer-to-peer is a prime example of how fintech puts customers first, directly connecting those investors who want to see their money grow faster with those seeking convenient loans. For all the perceived problems in the P2P sector, the fundamental market for the products have not changed. By remembering where it came from, and the problems it set out to solve, the sector can still thrive in 2020, even if the predicted economic downturn materialises. To avoid the pitfalls other providers have fallen into, peer-to-peer must embrace regulation, communicate with transparency and focus on leveraging their expertise to provide trustworthy customer-centric solutions.