P2P Lending Platforms Sustainability Challenges

S4F New European P2P Regulation @ SavingsForFreedom
P2P Lending Platforms with lower fixed costs will outperform and gain favor with investors over those with big, rigid fixed costs. Flexibility is critical.

We are living extraordinary times. P2P lending platforms that rely heavily on large marketing expenditures to generate growth will come under investor scrutiny as they can no longer justify large customer acquisitions costs due to weak transaction volumes…

N26 The Mobile Bank @ Savings4Freedom

P2P Lending Contribution to the World Economy

Peer to peer lending is having an enormous contribution towards the economy, by providing financing to underfunded sectors in more and less developed markets. Going forward, it is clear these fintechs need more than ever to be aware of the challenges to growth. If the current economic environment doesn’t prompt P2P platforms to assess their business models in a critical manner, I don’t know what will.

Flaws in Business Model

For many P2P platforms their business models are simply not working. With models mainly based on “scale” and “critical volume”, the reality shows that even when the platform is capable of reaching and even exceed those desired volumes, they still keep burning through shareholder cash. Cash that from now on may be in shorter supply. The significant drop in lending volumes over the previous months is adding pressure to all industry players.

Now is the moment to see significant improvements in the industry practices with more emphasis on technology and financial sustainability.

Revising Business Models

Like all businesses, a lack of profitability simply depends on two things: revenues and costs. On revenue, there are probably limited options because the market has history on what such services should cost, so limited opportunities to increase fees and hence revenue.

Costs are a more interesting area to examine, with a big potential upside. Let’s explore this.

Office, IT and Employees

  • A smaller office reduces costs, remote working reduces re-location costs, and the combination of both can hasten profitability.
  • Specialist niche products from external suppliers, offering shared costs of development and maintenance, could save considerable costs. Instead of building IT in-house, P2P platforms can look to save money by using available flexible commercial platforms or components for shared costs of development and support.
  • Automated processes not only ease human workload, but they deliver consistency of approach and regulatory compliance. P2P platforms cannot be managed successfully without highly automated, IT active systems. Software must take the strain to enable growth without degradation in customer service, otherwise firms have no choice but to throw more and more customer service staff to manage the processes effectively. Commercial lending software should have scalability built in, saving significant costs in operations and headcount.

Going Forward

With the impact of COVID-19, there is uncertain in the economy, adding pressure for P2P platforms to optimize their business models in order to deliver their offers.

Flexibility in costs is critical. Quick wins could be in those changes to office, IT and employment costs to help P2P platforms achieve profit. Even more important right now, as static or dropping lending volumes in the short term, are a real danger.

The reality is that we as investors and also consumers as borrowers need these businesses to drive competition in financial services, and offer high returns long into the future.

What is your opinion?

What is your opinion on this subject? Which P2P platforms you believe are sustainable in the long run? It will be great to read your opinion on the subject.

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