First it should be investigated what kind of obstacles peer-to-peer lending platforms face under the current regulatory framework. Regulatory requirements can be difficult to overcome for young companies and additionally they face difficulties that strike at the heart of their business models.
Peer-to-peer platforms, can hardly compete with traditional banks on the basis of lower rates for borrowers or higher returns for investors. They, Fintechs (financial technology companies) in general, try to beat these traditional businesses with one major advantage: usability. Peer-to-peer lending platforms rely on the possibility to offer fast and easy registration processes that work for a majority of customers and which can be completed online. Additionally funding and pay-out of loans has to be conducted fast without any further actions needed to be taken. Peer-to-peer businesses, and Fintechs in general, do however experience difficulties with the implementation of such easy processes and unique selling positions (USP). Depending on the jurisdiction, the online registration process often has to be interrupted due to legal requirements for document-based verification of the customer or reference transactions (Referenzüberweisung) that need to be conducted385.
In Germany, for example, customers until recently had to identify themselves offline through an identification method performed by Deutsche Post (Postident), which required customers to personally show their ID at a post branch or identify themselves opposite a postman from Deutsche Post.386 Nowadays Deutsche Post and other identification service
providers have introduced online identification processes where the person whose identity needs to be confirmed has to show his/her identity card to a customer service agent via a video chat.387 These online identification processes have however come under
recent scrutiny by Bafin, which has introduced new rules for video identification methods in 2016.388 One of the biggest hurdles being, that only companies that fall within the
definition of sec. 1 (1) KWG, i.e. credit institutions, will be allowed to use video ident,389
which does not apply to the majority of fintech companies.
Additionally Bafin requires reference transactions to be conducted, i.e. a small amount needs to be transferred to the new account by customers who want to open a bank account
385 Bafin, Rundschreiben 04/2016 (GW) – Videoidentifizierungsverfahren, sec. II. (5)
386 Simplified description of the offline identification process performed of Deutsche Post performed by
post branches in accordance with the German Money Laundering Act (Geldwäschegesetz), cf.: https://www.deutschepost.de/de/p/postident/identifizierungsverfahren.html
387 Simplified description of the online identification process of Deutsche Post, cf.:
https://www.deutschepost.de/de/p/postident/identifizierungsverfahren.html
388 Bafin, Rundschreiben 04/2016 (GW) – Videoidentifizierungsverfahren
online. This poses a real threat, since it not only makes the registration process more difficult and time consuming, but it could become a conversion-killer, i.e. more customers could drop out of the registration process at this point. It is especially difficult for the main target group, younger customers, who may not be able to use a variety of fintech offers anymore, as they may not have another bank account yet390. Similarly people who
come to Germany from outside the European Union and do not have a bank account in Europe will face problems under this requirement.391
Furthermore peer-to-peer platforms also face regulatory obstacles that are difficult to overcome for young companies. In order to conduct direct peer-to-peer lending in Germany, peer-to-peer platforms would have to apply for a banking license themselves. However newly founded companies often struggle to comply with the extensive application requirements. A huge roadblock is the fulfilment of capital requirements, which can only be fulfilled if enough funding can be secured in order to hold sufficient equity capital in reserves against possible risks.392 Moreover it can be very difficult for
newly founded companies to fulfil the compliance requirements.393 A newly founded
company first of all has to build a strong team and define all processes for its business operations. Indeed, processes can be defined and set up according to regulatory requirements and recorded in policies at the same time, however this is not only very time consuming, but it is extremely difficult to set up a compliance framework for a non- operative company on paper without the processes having been conducted before. A very experienced team is required, who in the best case, has conducted these processes before and knows how to define them. But it should not be forgotten that someone who knows how to perform the required actions may not be fit for defining them. Consequently the only possibility for a peer-to-peer company or any other Fintech to start its operations fast, at least in Germany, is to find a partner bank with a banking license to perform the regulated activities. This will be investigated in more detail below.
390 Schlenk, Bafin und Politik werfen Fintechs Steine in den Weg 391 Ibid.
392 Germany: initial capital requirement of 5 million Euro, United Kingdom: initial capital requirement of
20.000-50.000 pounds, Sweden: minimum capital of 1 million Euro