T3 - P2P Lending, APIs & Open banking Flashcards
P2P lending
Provide online technologies creating a marketplace where investors who wish to lend funds can find potential borrowers & provide credit through P2P agreements. More efficient and allows wider range of lending to borrowers
What do P2P platforms do
Verify borrower identity & characteristics
Risk assessment
Legal Compliance
Process borrower payments & transmit them to investors
Crowdfunding
start ups usually earn investment online from a large number of people
Risks of P2P platforms
Lack of history in the context of technological product they rely on
Success of platform depends on number of borrower & lenders on platform
Data privacy: protection of info provided by borrowers and lenders
Open banking
Personal current account market often dominated by a few banks with comparatively little switching between bank accounts with huge advantages to incumbent banks
What does open banking do
aimed at enhancing competition, innovation, and consumer empowerment in retail banking. It is a set of services supported by Application programme interface (API) in which each service provider makes clear what they are offering and asks the customer for permission to access to their data
Open banking features
- Consumers share with 3rd party details of their transactions so alternative players in the market can assess what might be suitable and competitive products
- To facilitate this payment services providers are required to adapt IT systems to a single common API which facilitates compatibility with all providers
- Third parties allowed to seek access to a customers bank accounts if they are authorised
Economic implications of open banking
- Enhanced competition: lower prices & improved service between incumbent banks
- Lowering entry barriers: inflow of new entrants will erode the historic information advantages of banks as entrants leverage FinTech to challenge the traditional value chain with incumbents.
- Lower search costs for consumers: they can use a single banking interface when seeking particular products across suppliers rather than searching case by case
- Consumer utility: access to a wider range of products and services through specialist apps that are able to identify patterns of behaviour
- Enhanced Innovation: new products and services and modifications to existing offerings
- Enhanced information: to customers about their transactions could assist in their financial planning
- Less dependence: on banks and credit cards for payments services as consumers can make on-line credit transfers more quickly and cheaply.
Consumer side issues of Open Banking
- Security, compliance and outsourcing risk: security of data transfers, possibility of unauthorised data access, cyber attacks
- Trust & Confidence: purchase of some products may be infrequent , lack of full transparency
- Lack of consumers understanding of Open Banking or the regulatory protections that are put in place to protect the consumer
- Consumer concerns about erosion of ‘‘relationship banking’’: increased remoteness from suppliers of financial services especially when there is a shift towards algorithms
Bank side issues of open banking
- New and enhanced business risks: model risks, operational risk, cyberattacks, compliance risks, outsourcing risks
- Erosion of traditional consumer interface inhibits cross selling, repeat purchases, ability to overprice aspects of business where competition is weak more products and services are likely to become increasingly commoditised. Restricts margins & profitability
- Greater volatility of savings balances giving rise to increased liquidity risk as consumer inertia and loyalty are lessened. Deposit takers may have to pay more to retain savings
- Limited time for orderly and timely transition to newer business models
- Reputational risk associated with technology failures of one sort or another including that liabilities remain with incumbent even if service is via 3rd party providers
