The threat that is alternative lending is no more, according to a new report by Deloitte. The firm published a paper on the marketplace lending industry this week following a rocky month for the sector — the sudden exit of Lending Club’s CEO sent stocks tumbling. Soon after, the U.S. Treasury released its anticipated analysis on the alternative lending space, concluding the industry would benefit from heightened scrutiny and increased regulation.
What was once a disruptive behemoth ready to take on the big banks by filling in funding gaps left in the wake of the 2008 financial crisis has now been diminished, for some, to an industry in way over its head.
Deloitte’s latest report on the topic, “Marketplace Lending: A Temporary Phenomenon?” seems to belittle the alternative lending sector even further.
“We do not believe that the banking model will be fully disrupted by MPLs,” the report concluded, referencing marketplace lenders. “Based on our market sizing analysis, MPLs will not be significant players in terms of overall volume or market share.”
It’s a harsh prediction but a timely one, as doubts continue to surface about the resilience of the alternative lending space. But that doesn’t mean MPLs don’t have a future in the global economy, the report noted.
Nothing To Fear
For marketplace lenders to be truly disruptive, Deloitte said, they need to provide benefits for borrowers and lenders that cannot be offered by traditional banks. Analysts explored this possibility through a joint study with YouGov, with researchers examining how small businesses and industry players feel about the competitive advantages of MPLs over banks.
“Based on this research, Deloitte draws the conclusion that MPLs do not have a sufficiently material source of competitive advantage to threaten banks’ mainstream retail and commercial lending and deposit-gathering businesses,” the report declared.
Critical to this conclusion is the finding that banks have the resources to underprice their alternative lending competitors should they feel threatened by any loss of market share.
Banks’ cost-of-funds advantages outweigh the operating cost advantages of online lenders, researchers found. Further, while borrowers enjoy the speed and convenience of alternative lending platforms, financial institutions have the resources to eventually provide the kind of lending experience borrowers enjoy with MPLs.
And, in the U.K. at least, without MPL investments being federally insured by the Financial Services Compensation Scheme, investors are broadly aware of the risks, and borrowers will face the residual high cost of finance compared to traditional lenders.
Some marketplace lenders are fighting back against the conclusions drawn within the Deloitte paper.
“Having invented peer-to-peer lending 11 years ago, I have a rather different view of the future of financial services,” said Zopa Founder and Executive Chairman Giles Andrews in an interview with Business Insider. “I think we will increasingly see consumers voting with their feet, or more likely their phones, and seeking out best-in-class products and services based on where they can get the best value and also the best experience. They will look for products that are easy to understand and great technology solutions that make their life easier. I don’t think banks can begin to keep pace with that.”
“Many of the conclusions in the Deloitte report depend on assumptions which do not reflect the development of peer-to-peer lending to date,” stated a spokesperson for industry group Peer-to-Peer Finance Association, which represents firms like Funding Circle and MarketInvoice, in another interview with the outlet.
“Deloitte’s report appears to misunderstand how peer-to-peer lending works when it claims high rates will deter businesses from turning to alternative finance,” said the founder and chairman of MPL ThinCats, Kevin Caley, according to reports in Crowdfund Insider. “Rates of lending and borrowing are dictated by supply and demand, so if businesses are no longer willing to pay them, the market dictates that they will fail. Since its relatively recent inception, peer-to-peer lending has offered an alternative and often more accessible route to much-needed funding, benefiting thousands of small and medium-sized businesses.”
ThinCats‘ Caley continued with a practical view of the impact of the alternative lending space.
“The industry is under no illusion that it will topple High Street banks, which have existed for hundreds of years, nor does it want to become like them,” the executive added. “The sector is becoming more mainstream, but it will always remain an alternative to High Street banks, whether you’re a saver looking for better returns or a business unable to find the loan that suits your needs.”
Deloitte did not argue that, with its inability to scramble the traditional lending space, alternative lenders will fade into irrelevancy.
“We also do not believe that MPLs are a temporary phenomenon,” Deloitte stated.
Marketplace lenders will provide a fix for areas of lending in which banks are deterred thanks to high-risk market conditions, analysts said. They are also likely to remain popular with some investors that are looking to enter into new asset classes.
With its latest paper, Deloitte reiterated the idea that MPLs are likely to continue to service the market by collaborating with banks, providing Lending-as-a-Service solutions or linking with FIs to actually finance the loans issued through their online platforms.
“The U.S. market has already witnessed increased collaboration between banks and marketplace lenders, and Deloitte expects stronger integration of this sort to take place in the future,” the report noted.
As the firm already noted in an earlier paper, Deloitte added that MPLs have already proven a disruptive force in the financial services space. Alternative finance firms have guided the industry towards heightened trust of online transactions and fueled borrowers’ demand for near-immediate services. They have also played a key role in the proliferation of public data, Deloitte said, as MPLs look beyond traditional models for risk scoring.
But the bottom line, Deloitte concluded, is that — as the lending market stabilizes post-financial crisis — banks will continue to have a cost advantage over MPLs. With a lack of regulation in the space, plus heightened risk for investors and a lack of transparency for borrowers, mean bank lending is far from being in a position to fear the alternative lending space.
All in all, Deloitte predicted that MPLs will capture just 1 percent of the market by 2025.
“That is not to belittle MPLs’ undoubted achievements or the innovation they have brought to the market,” Deloitte concluded. “But we see them as a sustaining innovation, likely to be limited to serving profitable, underserved segments that are currently overlooked by incumbent banks.”