Open banking presents opportunities for peer-to-peer finance providers

We’re excited. December is here, which means 2018 is round the corner, which means PSD2 is round the corner after that! Now, that might not sound especially thrilling, so if you’re confused, let me explain. The implementation of PSD2 (or the revised Payment Services Directive) will herald the onset of open banking. You might have seen press regarding open banking: in short, it promises to give third parties unprecedented access to the consumer data held by big banks.

This could prove to be a definitive step beyond the age of siloed data and one-dimensional relationships between banks, other financial service providers, and customers. We’re moving into an age where new financial marketplaces could provide services that were prohibitively challenging for banks to create themselves - technologically and commercially.

Challenger financial services companies such as Monzo and Bud are building hubs devoted to connecting individuals and businesses with services. As well as increasing competition, this should help fintech businesses reach new audiences. This presents exciting opportunities for P2P finance providers.

Although lending through P2P platforms has increased exponentially in the last few years, it is important for these relatively young finance providers to look for new customer profiles and demographics in order to retain momentum. Earlier this year, for instance, Growth Street increased our maximum facility limit to £2m, up from £500k, helping us initiate relationships with more mature businesses.

In the event of adjustments to finance providers’ business models, being plugged in to marketplaces that register these shifts could be transformative. What if an open banking-enabled marketplace could immediately respond to a change in a finance provider’s proposition by alerting newly-relevant consumers or businesses? This agile service provision, so different to the stodgy long-term relationships many associate with the traditional banking model, has the potential to inject new life into financial services.

There are still hurdles to overcome before we get to this utopian scenario. The FCA is rightly concerned about the fairness and effectiveness of service comparisons, for instance. But the regulator has now begun accepting third-party status applications from businesses under the imminent PSD2 regulation that provides the backbone for open banking.

I hope that regulatory backing and oversight will help cement the idea of increased data sharing as a positive step. Closer links between traditional finance providers and challengers can be good for both parties - just look at Bud’s partnership with HSBC. The prospect of better integration might also herald the launch of new businesses and services designed to thrive in this newly competitive environment. Speeding up the underwriting process is just one way that I think open banking could make a real difference to end users eventually.

Increased awareness of alternative finance options will be beneficial for investors and businesses alike. Initiatives like Nesta’s Open Up Challenge, in which Growth Street is participating, have been important milestones along the way, but it’s only in January 2018 that we’ll begin to see the real effect of PSD2. Provided that competition is managed carefully, alternative finance firms stand to benefit from the changes wrought by open banking.

(Your capital is at risk if you lend to businesses. Lending is not covered by the Financial Services Compensation Scheme.)


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Written on in Business Insights