To be successful in business, you have to demonstrate your relevance to customers and your investors. This is often done by formulating a customer value proposition and it can even include an employee value proposition. Its intent is to clearly articulate the value you offer to clients, and it gives your brand the social capital to get a customer’s share of wallet as well as the correct profile to lenders when you want to lend money.
After the world financial crisis in 2008, many banks have since struggled to communicate the value they offer since people’s perceptions about their ability to add value has changed. Crowdfunding in the form of peer-to-peer lending (P2P) gave birth to alternative revenue streams that now offer options to people that would also not qualify for services offered in a traditional banking sector.
P2P lending has managed to settle nicely over the last decade. One must ask if there is a value proposition offered by these P2P investment platforms and how it compares to your traditional investment offerings. One would need to look at what the investment value add is with P2P lending.
To know what the true value is of P2P lending, let us look at what it offers you by looking beyond the monetary return it promises.
Willingness to Take a Risk
Small business and or new startups often find it hard to raise the capital they need from traditional banks. This is because risk evaluation is the deciding factor for any bank and it’s often the thing that prohibits new or small players to engage with traditional platforms.
DBS SME Banking sums this up nicely. They argue that it’s harder for a bank to issue unsecured lending because a bank has been entrusted by other investors to take care of their funds and to produce a decent return on their investment. This means that the appetite to take a risk is far lower.
A P2P investor on the other hand is investing in their own capacity and this will improve the overall appetite to take risks. The is value that speaks to the needs of the businesses that would otherwise not be able to secure funding.
This is an incredibly big value add and still speaks to why P2P lending was started in the first place. Keep in mind though, there are limitations to P2P lending and businesses should strive to foster a positive profile with banks when they need larger sums of capital that might need a more specific repayment structure.
It Doesn’t Limit You in terms of Geography
This has got to be the biggest advantage of P2P lending—the mere fact that transacting between different parties across different sovereign borders and time zones is made so easy with P2P lending. P2P platforms help you to transfer funds in a fast and secure manner, and this includes transacting both ways.
Yes, sure there are admin and remittance fees, but it is far less complicated than doing this via traditional banks (which is not worth the effort for small amounts). Time is money and P2P lending understands this underlying need for speed when it comes to lending.
It Is an Alternative Investment Avenue
In much of the developed world, banks do not offer an excellent return on investment to people that put their funds into a fixed-term investment portfolio. You will often find that you are actually losing money because the inflation rate is higher than the return percentage offered.
Deposits.org is a nice way to get a bird’s eye view of who offers what and how good or bad the return is when comparing it to the inflation rate. There are exceptions, but the rule of thumb in most of your industrial economies like the U.S., UK, and much of Europe is that they don’t have banks that offer anything worthwhile.
P2P lending’s appeal from a value point of view is nicely summed up by an article done by the Economist on banking without banks. They argue that if you are a U.S. or British investor, banks offer just about nothing, while P2P lenders in those two territories at least offer 4.9 percent. Compare this to an average of 0.2 – 1 percent, it’s not hard to see why P2P comes out tops because inflation averages 2 percent in both regions.
They Do the Screening for You
As an investor, you can see that most of your reputable P2P platforms have put in place screening capabilities that give an investor the ability to measure risk. This increases your chance of attaining a more satisfying return in exchange for taking a calculated risk.
Banks do the same, but exclude a lot of people and businesses due to the criteria that they want people to confirm to. P2P lending platforms are more welcoming and can see the forest for the trees in a more flexible manner.
What’s the Verdict?
P2P lending offers a value proposition to both the investor and lender in the sense that it is more flexible and faster to transact on. P2P also offers a much better return and it does tend to be far easier to interact with.
One thing to always keep in mind is that any investor must diversify their portfolio, and both traditional banks and P2P lending should form a part of your portfolio. Traditional banks also allow you to gain more value once larger amounts come into play like property transactions.