BS7571: Strategic Decision Making
~ Dr. Konstantinos Pitsakis
The lack of trust in the banking system due to the financial crisis led to the growth of a digital platform that provides peer-to-peer investment opportunities in China, Europe, and the US. With the ongoing debate on about the capital progressing in Europe, policymakers have identified the prospect of there being a possibility of for the lending industry and digital investment to aid in the unification of the capital market that has been missing for a long period. The instantaneous creation and implementation of the of unified equity market have been made difficult by the differences that exist in public listing and bankruptcy regulations. The European Commission has noted that digital investment services create opportunities for borrowers from different countries to be able to get funding from various locations despite the existence of variation in public listing and bankruptcy regulations that makes the immediate formulation and implementation of a unified equity market. It was noted that the creation of peer to peer lending platform would aid in serving the issues being faced by small and moderately sized enterprises that form the vast majority of businesses in European countries (Milne and Parboteeah. 2016). The small and medium-sized organisation finds it difficult to access funding from traditional banking since they mostly lack reputations or collateral. The new implemented lending method, that is peer to peer lending has been able to survive without the merits that are required for one to receive a loan from the traditional lending system. The lack of regulations, uncollateralized, and unsecured lending and the absence of delegated supervision might, however, reduce the investors' protection.
The Attractiveness of the UK Peer-to-Peer Lending Industry
Research conducted by trade body of the P2P financial association indicated that peer to peer has become a considerably significant source of business and individual funding in the UK, and especially for small businesses. In 2016, the volume of lending among the country's primary P2P lending platforms increased by two-third and by the year ending 2017, the cumulative total was more than 8 billion Euros. In the 3 billion euros that were rent via online platform in 2017, two billion euros were used to finance small business indicating the increasing importance of a different financing method for SMEs in the UK.
The implementation of P2P lending has led to the creation of real benefits not only for the SMEs in the UK but the whole economy at large. The governments, therefore, have the responsibility of creating a favourable environment that will allow and encourage continued growth an innovation for the industry.
Constructive Group Analysis of the UK Peer-to-Peer Lending Industry
A strategic group is an idea that is used in strategic management, and is also used to group organisations that are in the same industry and that have business models that are similar or that apply the same type of strategies. The number of groups in a particular sector can be determined by the different kind of services or activities that are involved in the industry. Different platforms in online P2P lending differ according to the strategy adopted. They are mostly separated into two types, that is, non-commercial and commercial platforms. Non-commercial platforms are those that limit their activities to national market while the commercial peer to peer lending industries are those that operate in an international market (Degryse and Ongena, 2014, 40). Variation between the two platforms is the lenders general intentions and what he is expecting regarding returns. A lender that is engaged in commercial platforms can receive a reasonable interest as a compensation for the risk they are taking. Lenders that are involved in non-commercial platforms receive little or no benefit for their risk. In the non-commercial platform, lenders are willing to offer the loan for a certain project in regions that are economically underdeveloped.
Peer to peer lending companies can be structured using the stakeholders' perspective. Various platforms and individuals that form part of the lending companies can be structured according to Freeman's stakeholder's approach. Stakeholder as an organisation can be described as any group or person how can lead to change of change by the achievement of the objectives of an organisation. An example is the external shareholder of commercial lending platforms like borrowers, lenders, and communities. Borrowers and lenders are the main targets of the online P2P stage activities. Lender seeks opportunities that will allow them to make as many profits as possible; on the other hand, borrowers seek for the opportunities with default risks and looking for sources of liquidity (Emekter and Jirasakuldech, 2014, 33). P2P platforms act as areas where people can converge hence make it possible for the lender and the borrowers to come together. Borrowers and lenders can at times form groups of small communities where they discuss their interests and concerns.
Partner banks, regulatory authorities, and credit bureaus. The formation of any financial market requires one to adhere to different policies of the local authorities that vary according to with countries. One of the fundamental requirements is to have an original bank as partners in operative business. The involvement of banks is mostly used as a means of facilitating the lending process. The process is used as a means of confirming the borrows identities by various monitoring agencies or credit bureaus. Another aspect that is considered when structuring peer to peer organisations is the lending process. There are platforms that connect borrower and that lender directly while others connect them through brokers. Some websites like the www.prosper.com use process of auctioning where borrowers can be able to determine the limit of interest rate that they can be able to settle. For a specific period, the auctioning activity last for 14 days at prosper cite lenders are then given the liberty of making their bid by describing the level of funding they want to offer and the least amount of interest they are wishing to receive. In this kind of sites, the lenders can still place their bid even after another person has already set their bids. In such a case where many bids have been placed, the proposal that has the lowest interest rate is selected. Other platforms like the German platform smava.de, issue their interest rate according to the borrowers financial and demographic characteristic.
Another aspect that is used constructive group analysis in the UK is financial determinants. Most peer to peer lending platform issue a general description of the type financial characteristic of the one requesting for a lone or funds to the one offering the cash as the basis for evaluating the indicators of creditworthiness. Economic characteristics that are observed by banks so that they can evaluate the credibility of the borrower are detailed information on monthly and income expenses, debt-income ratio or house-ownership and credit rating (Feng and Yoon, 2015, 242). They are often set by rating agencies that are external and that lead to the aggregation of financial and personal features to a credit score. Some arenas like prosper.com offer more information on the financial position of a borrower like bankcard utilisation and current open credit lines. Another factor that can be used in conducting strategic group analysis is the demographic characteristics. Research has indicated that discrimination plays a significant role in in the likelihood of funding and interest rates.
Current Strategic Positioning of Funding Circle
Groups and group intermediation is another factor that is used in conducting strategic group analysis. In most case, P2P lending platforms, members are not given the liberty of forming unique communities. If a group is designed using the correct incentives, it becomes easy for them to clear some information hurdles. An example is that, if one is a associate of a group that has been trusted like prosper, the probability of getting a loan fully funded is high.
After several months of creative development, that involved leadership interview, customer insight and creative workshop, the new brand of the Funding Circle were released in the market. The company was able to develop an emotional positioning that would prove operational within Funding care Circle client while at the same time creating a sense of confidence as a financial company (Funk et al. 1970, 19). Funding Circle has been able to identify a common thread that connects small business persons, people working in the organisation and investors. The organisations have therefore developed a positive attitude towards work and life, and an unstoppable determination to remain relevant and successful in the market.
Four Relevant Scenarios to help Funding Circle
When analysing the main factors that affect the bidding strategy of lenders, three measures are considered, that is, number of bids, funding success, and funding time. The approach of borrowers in three groups are also analysed with regard to their expertise level in wired P2P lending, that is, mixed borrowers, novice borrowers, and pure borrowers. Data from PPDai should be used to finds the positive sustenance for the rate of interest, while incomplete evidence is gained from rendered money and the loan duration (Herzenstein et al., 2008). Studies have indicated that if there is a significant amount of loan, leads to an increase in the chance of attracting and funding more creditors. This indicates that varying creditors policies should be applied in the Funding Circle strategy in the P2P should exist in the where individual credit information is reliable is available (Dhar et al. 200, 550). When analysing borrowers, it is clear that diverse type of debtors requires varying constituents when scheming a mortgage. Debtors that have a higher experience in the field propose a credit at a low cost. Pure borrowers put more concentration on loan and rate amount while mixed borrowers emphasise more on loan period. Studies conducted in the UK market indicated that borrowers mostly mixed borrowers, have the tendency of using higher trustworthiness to seek enormous loans without the need of decreasing the loan cost.
Studies to determine the factors that affect the online P2P lenders bidding strategies have been established for an extended period. The bidding strategies have mostly been based according to the funding success rate of a loan. The primary determinants of for the success of an investment can be categorised in four parts: user credit or financial information; loan characteristics, that is, amount of loan, interest rate, and loan period; soft information like friendship network, social capital like and lastly demographic information.
To make sure that Funding Circle has stayed relevant for the next 20 year, it should analyse the type of financial or credit data, such as bank accounts, house ownership, credit rating, borrowing history, ratio of debt-to-income to felonies that influence the probability of accessing the listed loan. Credit evaluation is the most critical aspect that affects the rates of interest. The ratio debt-to-income is the second most significant factor that influences and if the banker has a bank account, then, the loan request has a higher probability of being successful (Morse 2015, 478). Research has also indicated that the history borrowing has a robust influence on the accomplishment of a lending company. The company should always consider borrowers with a successful history since they have a higher probability of securing funds.
The organisation should create policies that require the supervision of each account in at least ones a month to assess how the business of the client is progressing. Accounts that will be having overdue instalments will necessitate more frequent visits. Funding Circle should also be update their system to make sure that each loan officer has direct access to up to date and accurate information on the information of every account. The organisation should make sure that they support zero tolerance for delinquencies and loan officer should make sure that they call the client when their loan is one day rate. Each officer should be given a personal digital assistant tool that will be used in the facilitation of account monitoring and in payment collection. Effective and dynamic account monitoring system should make sure that timely accurate and comprehensive information of the payment performance have been made. An organisation should make sure that they have developed an accurate and relevant management information system that can be used to that there is an effective and mandatory monitoring of their clients.
The company should be innovative enough to make sure that it has attracted more customers, it should adjust on small loans since small loan amount can aid in raising the success rate and reduce the interest rate. Research has also indicated that it is tough for loans with a more extended period to access to funding because it would offer liquidity that will be enough for others.
Funding circle should make sure that they have created standardised processes for their loan approval. They should adopt innovative ways like using amortisation tables that have been pre-computed that can be used by loan officials to calculate the maximum amount that can be given to a specific borrower. They should also come up with an integrated application form that has basic information of the borrower, a space for signature approval and a loan officer worksheet, having done this, the need to create a separate credit memorandum to make the request formal will not be necessary. The organisation should also come up with easy and fast ways that can be applied in the procedures of credit approval with the aim of improving effectiveness in service delivery and at the same time reducing the risk involved. The organisation should use procedures that will make sure that the documents needed for pre-approval are kept at a minimum. The authority of approving credit should be decentralised within some particular limits to enhance loan approval.
The consideration of the type demographics will affect the decision of the client. When addressing the issue online, the company has to consider the question of diversification, that is, the effects of gender, age, and race and their success rate on money lending seem to be varying according to different geographical regions. Studies have indicated that younger borrower is successful; women are more tolerant when they are charged a low rate of interest from both lending and the borrowing sides.
Research on soft information will aid Funding Circle in enhancing the competitiveness of the company for an extended period. A study of soft information indicates how group, friends, photos, or borrowers narratives affect the borrowing or lending capacity of an individual. The hard to understand factor influences the experience of users with a platform and acts as evidence that is indirect of the user's trustworthiness hence influencing the rate of success of the funding and the consequent rate of interest of the loan that has been secured. The loan officer should conduct at a personal level an investigation of the clientâ€™s willingness to repay the loan. They should check the reputation of the borrowers in the society. the loan officer should cross check with neighbors and community leaders so that they can have a clear understanding and decisive judgment of the customer. The loan officer should also verify their relationship with the borrowers, that is, paying habits and duration which their relationship has existed. Research has indicated that some loan officer ignored the information that was corrected on the time a borrowerâ€™s personal information was being reviewed. Funding Circle should make sure that they have subjected all loan applications to a credit score card that will have been developed internally.
Attractive Market for the Funding Circle Internationally
Studies to the growing market of the alternative finance have indicated that countries like Latvian, Switzerland, and Argentina present an excellent opportunity for the development of P2P lending and borrowing services. Research has suggested that Swiss is among those countries that are expected to show outstanding growth. In 2015, the value of the peer to peer market recorded an additional 26 million euros, and it was supposed to reach 61 euros in 2016. The region has more than 40 P2P platforms that encourage the growth in the industry, the reputation of the industry and the quality of life standard found in the area (Duarte et al., 2014, 2468).
Another market that would provide a perfect marketplace for the Businesses of Funding Circle is Latvia; the country has gained a lot of relevance in the European Fin-Tech market. Studies have indicated that the countries market volume was estimated to be at 14.99 euros hence n being behind most of the leading countries. The Latvia platform was placed by 2016 KPMG Baltic behind French and German all thanks to the highest dynamic that was being experienced in Europe (Freedman and Jin, 2011). With the country being in a geographical position that provided a regulation-free for European investors to join different lending and borrowers platform played a very vital role. The legislative regulation that has been specialised in an international relationship that is still expected to be in power until the end of 2017 provides additional opportunities for the local P2P division.
Ways to Improve Sustainability of Funding Circle in New Market Venture
For Funding Circle to efficiently expand over the next ten years in the new markets, it has to reduce the risks that are associated with the industry standardisation. The UK P2P Financing Association is taking a leading role in enhancing the transparency and data standards. However, more need to be done (Cahan). There should be agreed standardised metrics of different loan characteristics such as industry and purpose of loan, a borrower level of credit are needed to allow the transfer of loan contracts from one platform to another hence enabling the development of comparable risk measurements and creating platform where risk can be evaluated using combined data from various platforms (Herzenstein et al., 2008). The use of such measures will aid in the determination of losses on loans that have been defaulted, either through the management of inventory, outright sale or recovery of retained loans using collection agencies.
Funding Circle will also need to be more transparent about their financial and operational performance.one of the main reason why most of the platforms that operate in the UK experience losses is that they just don't offer enough publications information to work out their day to day expenses such as loan serving and separating them from expenditures that are dedicated to the development of their clients base and working system (Lin et al., 2009). The creation of improved standardisation, on both full organisation transparency and ability to transfer the loan from one platform to another, will aid in enhancing the effectiveness of P2P platform in the new markets. Despite there being some challenges with the adoption of standardisation by individual P2P platforms due to adverse effect that might be experienced through standardisation, people with personal platforms need to endorse and not resist the movement (Herzenstein, 2011, 30). The main point of concern of P2P lenders is not the platform that they run, but rather the interface they offer to the platform, risk assessment and management, and the different services they provide to their clients for portfolio allocation.
The strategies for strategic options for peer to peer reviews cannot be implemented in isolation, instead, thy act as comprehensive and wider framework that can be used to cover crucial and significant aspects of small businesses lending. The main presumption in adopting these strategies is having a through, well-grounded, and comprehensive knowledge of the specific market that is being targeted. Creating strategies that are misleading can be fatal. Its is also not correct to assume that strategies that have been successful in one country will work the same in another country. Studies from different lending companies have indicated that peer to peer lending can be a profitable venture. Peer to peer lending demand has increased all over the world and the significant profitable opportunist in the market is promising. Proper applications and the use of well adopted procedures can be used to transform the venture into a profitable business.
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