Friday, 29 January 2016

Showdown: Peer-to-Peer Lending Vs. Traditional Banking

Innovation always leaves those behind who don’t adapt quickly. Traditional banking may join that crowd in the not so distant future.

With systems such as Peer-to-Peer lending falling into place, it is only a matter of time.

The real question is ‘When will the banking industry realize this?’

Peer-to-Peer lending is financial engineering at its best. Borrowers have access to quick and easy funds while lenders are provided massive returns on investments very quickly which have no competition among various financial instruments. Everyone is looking for new asset classes where they see a scalable opportunity that can yield play.

For many of them, the attraction of P2P can be summed up in only one word: Returns.

While returns from traditional investment options provide you returns of up to 8-9%, P2P lending provides investors with returns as high as 27% and even more. Investors now look at investment options where there is short duration combined with high yield. It’s combining the liquidity premium with higher returns. It takes the best of both worlds.

Slowly and steadily many institutional lenders are joining and even replacing many of the peers who lend on the websites.

Once the traditional banking industry realises the threat of social lending, we can expect to see more encroachment, partnerships and eventual M&As across the sector.

Distinguishing between the two may not even be possible in 20 years. Whether the banking industry wholeheartedly embraces the crowd or only in a hybrid form is something we have to wait and see.

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