Peerless banking

I've just come across a new blog by Mike Schoeffler who runs a software company that addresses the problem of deposit pricing.

He's written a set of three posts on Zopa and peerless banking, and takes the view that the inherent advantages of a bank (branches, simplicity and safety, for example) will likely outweigh any pricing benefits for a typical purchaser. 

I rather like his summation on his last post:

"My prediction - zopa will achieve terrific results, but the industry will benefit.  The biggest enemy for bank profits is not competition, but internally wasteful processes and unfocused marketing.  As banks simplify and improve, everyone will benefit"

That's an interesting point, since examples of very wasteful processes are everywhere in banks (read my experience with what I thought was a fairly simple international funds transfer here).

But the real question in my mind is whether P2P lending takes loans from existing players or creates a new segment. If the former, and the business model is attractive to both investors as well as lenders, then I'd argue that the inherent advantages of banks quickly become liabilities since they will find it impossible to compete with the cost basis of P2P.

On the other hand, if P2P is a new segment and the result is that more loans are written than before then banks don't have much to worry about, excepting the additional competition for deposits. But investors have always had many places to put their money, and the more sophisticated, the more choice they have.

My personal view is that what will determine the success of P2P is whether they can recruit enough sophisticated investors to fund their loans. According to this report, only about 30% of loans get funded at present on Proper.com. And it does demand a sophisticated investor: practically everyone I've spoken to - incredibly, this includes some bankers are well - fail to understand that Prosper and Zopa are just like banks in that they enable risk to spread across a portfolio.

In other words, the thing that has to be determined is if there are enough people with money to spare, an understanding of the economics of risk, and a willingness to try an innovative model to make the whole P2P thing fly.

Because if borrowers find their loans aren't getting funded, sooner or later they'll stop asking for loans.