The curious incident of the return of a medieval exchange system: Four reasons why P2P may not be here to stay (in its current form)

06 November 2015

Long before the rise and subsequent monopoly of the banking industry within commerce, the majority of financial transactions were carried out personally between individuals.  Then, sometime in the mid 15th century, the emergence of banks began to present people with a new way to engage in financial transaction. In recent years however, it seems we are now heading back in the direction of individual personal exchange. Person to person payments are back – but not in the same way as before.

Enter P2P, the 21st Century cattle and chicken market.

Simply put, P2P is an online technology that allows customers the quick transfer of funds from their bank account or credit card to another individual’s account via the Internet or a mobile phone.

Historically-low interest rates in Europe makes credit cards unpopular. In the search for alternatives, the world has gone P2P mad.   For example, SMEs, facing the shutting of bank doors in their faces (sometimes literally) are turning to P2P platforms, which can provide much needed funds.

P2P platforms are doubling their funds every 9 months and growing rapidly. They provide higher speed and efficiency through technology in comparison with traditional lenders. The efficiency of P2P is making it increasingly popular. Companies such as M-Pesa and bKash are leading the way in the transformation of financial exchange with their easy-to-follow procedure. Just as Uber and AirBnB are changing the taxi and hotel booking markets, the likes of Lending Club, SoFi and Funding Circle are doing the same for the financial transactions industry.

The emergence of P2P is gaining so much traction that even Facebook and Google have provided their users with the option to easily send money to other users. You don’t need anything except accounts to use it. Swift accessibility and rapid operation- it is easy to see why P2P is attractive to the user.

Even financial giants like CiTi group are capitalising on the benefits of P2P lending for investments. The operation costs with P2P are lower (about 3% using P2P compared to 7% for banks); furthermore they are free of banking regulations that make it more difficult to find investors.

If you have access to cellular network coverage then you have access to payment transactions. Wonderfully simple – what could possibly go wrong?

What indeed.

  1. P2P may not stay unregulated forever

    Just because regulators do not currently marshal P2P, there is nothing to say they won’t in the future. At the moment the P2P market is free to try new methods.

  2. P2P has the same pitfalls as the banking industry

    P2P should not be regarded as a miracle in the world of commerce. There is every chance that the benefits of P2P could become its downfall. Problems may start appearing when P2P lenders begin borrowing from other P2P lenders in order to refinance their own debts, forcing regulators to step in to clean up the fall out.

  3. Lack of security

    Just as people stole money in every other evolution of payment, we can be sure that criminals are right now finding a way to make illegal gain from P2P.

  4. P2P may not be sustainable and come crashing down

    Without rigorous checking systems in place, some P2P systems allow bankrupts and others to slip through the system, leaving it vulnerable to defaulters.

That being said, for the time being, P2P is increasingly an option for the user and perhaps banks need to change their ‘traditional’ mindset in order to compete with new FinTech companies. But this is a question to explore another day.

Commerce has evolved beyond the individual-to-merchant relationship to a broader, individual-to-individual exchange method. The question now is whether it is a change that is here to stay or whether the banking industry will re emerge, the wheel having done one more turn around.

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