Marketplace lending platforms don’t scare the banks, P2P funds do
Neil Tomlinson, Head of UK Banking, concludes that from the report findings there’s a suggestion that marketplace lending platforms ‘are unlikely to pose a threat to banks in the mass market’ but they are ‘likely to find a series of profitable niches to exploit’.
A Disruptive Threat or Sustaining Innovation?
The Deloitte report’s release seems to coincide with some heavy scrutiny on the global P2P market: Lending Club’s misconduct has sent an uneasy ripple across the industry, not least in the birth place of peer-to-peer lending, here in the UK. In reference to one of the main questions posed in the report, ‘is marketplace lending a disruptive threat or a sustaining innovation?’, the report finds four main reasons for peer-to-peer lending’s competitive advantage:
- A fundamentally lower-costing operating model.
- An ability to use public data to (safely) overcome incumbents’ data advantage in scoring risk, potentially going on to achieve better risk-pricing by taking a more agile ‘Big Data’-based approach.
- A superior customer (borrower) experience, driven by speed and convenience.
- An ability to better absorb and diversify risk by matching the appetite of borrowers and investors for both risk and duration.
The report proceeds to decipher how banks have managed to stave off the competition, so far.
- Banks can borrow cheaply through inexpensive deposits, a benefit enabled through government underwriting of deposits, leading to banks justifiably having a structural cost advantage over marketplace lending platforms, but only if and when the credit environment normalises again.
- Customer awareness of marketplace lending is fractional compared to that of banks. One in 20 retail consumers (download report) who are aware of P2P lending has lent through a P2P platform.
- Banks have a large customer-pool with tested and established acquisition channels. Marketplace lending platforms are digitally innovative, but still rely on expensive channels such as traditional – TV, radio, print – comprising 60% of UK platforms marketing spend.
P2P Funds and Investment Trusts Pose Threats
Irrespective of the debate between the ‘traditional banks’ and ‘digital lenders’ the Deloitte report’s author, Neil Tomlinson, does propose one striking threat to banks: Marketplace lending (P2P) funds and investment trusts giving rise to a larger customer base accessing the market.
This risk is that marketplace lenders might provide easy access to a new, higher-yielding asset class for those deposit-holders whose low returns currently provide banks with their advantaged funding base. This advantage is the key to banks being able to sustain their position on the borrowing side of the market.
We believe marketplace lenders are likely to secure a strong foothold in areas of the market where banks do not have the risk appetite to compete. This will form a bridgehead from which they can expand at those times in the cycle when banks are pulling back from lending or relying on super-normal profits in order to cross-subsidise other parts of their business.
The Deloitte report comes at a poignant time in marketplace lending’s evolution. Financial advisers were granted permission to recommend P2P investments to their client-base in April. For them, this report could be a useful resource to better understand the risks involved in peer-to-peer, but until an independent research facility emerges to help investors and advisers benchmark the disparate products on the market – for personal as well professional (compliance) purposes – then the uptake from advisers is expected to be low.
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