Marketplace lending platforms don’t scare the banks, P2P funds do, according to Deloitte’s report
Consultancy giant, Deloitte, released their report ‘Marketplace lending: A temporary phenomenon?’ citing the desire for marketplace lending/P2P funds and not online P2P platforms as the only real, material threat to the banking industry.
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’.
Download the report here!
A disruptive threat or sustaining innovation?
The Deloitte report is underpinned by one significant question, one that is pertinent to global marketplace lending given recent revelations around U.S giant, Lending Club, and its lending misconduct. The question is: ‘is marketplace lending a disruptive threat or a sustaining innovation?’. The report prescribes four main sources for peer-to-peer lending’s competitive advantage:
- A fundamentally lower-cost 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 delineate just why and 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 normalizes again.
- Customer awareness of marketplace lending is fractional compared to that of banks. One in 20 retail consumers 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.
At Orca Money, we would argue that the emergence of independent, impartial and informed resource centres where the market can be researched and compared, at a cheaper cost for the platform, will support growth and reduce costs.
P2P funds and investment trusts pose threats
Irrespective of the debate between the ‘traditional banks’ and ‘digital lenders’ the Deloitte report author, Neil Tomlinson, does propose one striking threat to banks. That of the P2P/marketplace lending 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.
- Neil Tomlinson, Head of UK Banking
With continued online innovation in marketplace lending, including data standardization and software solutions/tools providing greater analysis of the market (particularly useful for IFAs), it is only a matter of time before the Wealth Management and Peer-to-Peer Lending industries conjoin.
