Fintech has been one of the bright spots on Wall Street for some time now. Firms in this industry have represented the lion’s share of growth in the financial sector. Despite a few recent bumps in the road, the upward trend for the industry seems likely to continue.

Recent growth of the fintech sector results from efficient business models and strategic competition. This is especially true of the peer-to-peer (P2P) lending segment. Fintech companies offer more efficient business models. Plus, their management is more nimble. Executives understand the importance of identifying underserved markets.This allows for innovative financial products at lower costs, which creates new markets instead of competition with banks.

The P2P industry has matured

P2P lenders first came on the scene 10-12 years ago. 

Now the industry is maturing, which keeps costs lower. A recent report from Morgan Stanley points out that global online lending will continue to grow. By 2020, the number of P2P loans should rise from $20 billion to close to $500 billion.The highly efficient business model is also spreading to more segments, specifically equity crowdfunding, mortgage finance, and the insurance sector.

Most P2P loans are to a small business or for real estate. However, some firms now loan for cars and other personal needs. If a person has too much debt on their credit cards, they can find a P2P loan for consolidation.

Is your neighbor financing your mortgage?

P2P real estate platforms dealt only with commercial properties until a few years ago. Now they are spreading to residential real estate. Fundrise launched loans for single family homes after a trial run in 2014, and others are getting into this market too. Most of these P2P home loans are for larger loans to borrowers with excellent credit.

Investors can now design their own mortgage portfolios. They choose the location and the creditworthiness of the borrower they loan to. This way they can figure out a return based on their own risk tolerance. It helps to know the local real estate market. You might, for example, invest in mortgages in your own neighborhood. You know your neighbors. Do you think the risk of them defaulting on their mortgage is remote? If so, why not lend to them through a P2P ?

Fintech is moving into the insurance sector

Fintech firms in the insurance sector are either insurance brokers or carriers. The brokers now reduce costs by pooling policyholders into “affinity groups.” This way, those with fewer claims will earn discounts on their premiums, and P2P firms are now underwriting their own policies.

A wave of P2P insurance brokerage firms have launched across the globe in the last few years, including Guevara, Friendsurance, InsPeer, and Bought By Many. Lemonade is the first US-based firm with a P2P insurance funding model. The firm began the process of becoming a licensed insurance provider in New York State late last year. Uvamo is another P2P insurer which will launch in the next few months. It will keep administrative expenses low by offering property and casualty insurance direct to consumers online. The insurance industry has high fixed overhead costs. This means that a big chunk of premiums end up being spent on costs instead of covering losses.

Investors can participate in various insurance pools. Their funds help make up the required capital reserves. At the end of the term, when all claims have been paid out, investors and the company split any remaining funds in the premium pool.The funds put up by investors are used to pay any claims beyond the premiums in the pool. Note that investors can lose no more than their original capital. The insurance firm will pay any approved claims above the total amount in a pool.

Fintech is becoming mainstream

Fintech is rapidly becoming a part of the mainstream financial market. P2P firms have many innovative new products. This is both creating new markets and driving prices down in segments where P2Ps compete with banks.

Fintech is here to stay. Over the last year or so, nearly all of the major Wall Street banks have taken stakes in fast-growing fintech operations or are copying their business models. BBVA Compass (BBVA) has been a leader in this. It has acquired and partnered with fintech firms. In 2014, BBVA snapped up fast-growing digital bank Simple. Earlier this year, BBVA acquired online business bank Holvi. That firm serves entrepreneurs and small/midsize business clients. The firm offers both traditional banking and business services via a user-friendly online platform. BBVA has also recently inked several other fintech-related partnerships.

Financial giant Goldman Sachs (GS) plans to go digital. It bought up online wealth manager Honest Dollar this spring. The bank’s online lending program, "Mosaic," is a high priority. Goldman Sachs is making deals with a number of fintech startups regarding partnerships and joint development deals.

Fintech’s future

The fast growth in fintech will continue, and P2P is a major part of this growth. P2P has shown how things can be done without high costs. It makes things simple and cheap. Big name firms see that growth and want in.

 

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