Will the rise in peer to peer lending end in tears?
In 2012, the supply chain finance debate became louder and more relevant to more businesses. It’s been described as the perfect storm – the combination of constrained liquidity and very low interest rates means that the gradient between the business “haves” and “have nots” has become steeper – and banks and investors love steep gradients.
Supply chain finance is not new but new approaches are emerging based on new and innovative use of technology. In the past, the banks were the only players and they would only play with the big boys. For it to be profitable, the numbers had to be big and the cost of entry was high. But now, as collaborative supplier networks and the associated technology have matured more complex deals can be managed and the cost of entry has plummeted. Increasingly, businesses as well as individuals are turning not to the banks, but their peers for financial support.
The demise of the banks
Some people think I have a downer on the banks. It simply isn’t true. I do however believe that the banks developed inordinate power before the global financial crisis. Businesses benefited – or at least it felt like it at the time. We now find ourselves trapped in a situation where businesses cannot operate without banks and bank can’t, in many cases, do anything for business. And it will get worse as the requirements of Basel III make it even more difficult for the banks to support business.
Banks need to learn to make smaller profits. I’d like that to be so that they can do more to support business and help them thrive through hard times but my concern is that the tighter regulation will absorb any flexibility released by lower margins.
Peer to peer lending (non-bank lending) is growing rapidly. It’s thriving because it’s filling a vacuum but it could end in tears. We’re going from a moderately regulated market that got out of control to a market so tightly restricted that it can barely operate. It’s not surprising that a new unregulated market pops up.
Regulation is good. A straight jacket is bad. We should leverage the power of cash rich businesses and individuals to support cash constrained businesses and individuals but doing that in a controlled way will require imagination.
Pete Loughlin can be found on twitter @peteloughlin