In its first significant move since calling off an IPO last year, banking software provider Misys took a bold stance: Alternative lending’s days are numbered. The company recently launched a new solution for its FI clients that want to offer their customers a P2P loan, a solution that nixes any need for banks to partner with or acquire an alternative lender.
That new service is software for banks to offer the types of loans currently offered by many alternative and marketplace lenders today, in the form of individual or institutional investors. It’s a way for traditional FIs to fight back against the competition P2P lenders have introduced, explained Misys Senior Product Officer Jean-Cedric Jollant in a discussion with PYMNTS.
“There's clearly a demand for [banks] to take back that piece of the lending market,” he stated. “The core business of banks is lending money, and just because a new way of lending money has been created doesn’t mean it doesn’t belong in a bank.”
The rise of alternative and marketplace lenders emerged because traditional FIs weren’t agile enough in their innovation and technology adoption to develop the convenience and efficiency new market entrants offered, he added. The seemingly simple concept of even offering an entirely digital loan application process wasn’t an expectation among individual and corporate borrowers until the AltFin explosion of recent years.
But 2016 was a pivotal year for the alternative lending sector, Jollant said, and in many ways revealed that the industry was not the “knight in shining armor” that many borrowers envisioned the space to be.
“Banks have evolved to bridge the technology gap,” he explained, adding that traditional FIs are now able to offer the seamless, all-digital experience of borrowing money. In some ways, that’s because top banks have partnered or even acquired alternative lenders. Jollant pointed to JPMorgan Chase as one of the largest and first banks to collaborate with an alt-lender, OnDeck Capital, towards the end of 2015.
These tie-ups allow banks to have access to the technologies necessary to offer a digital lending experience, which, Jollant said, is largely the sole competitive angle alt-lenders have against traditional FIs. He pointed to the cost of borrowing and brand reputation as just two ways banks will consistently have a leg-up on their AltFin rivals. Plus, he added, marketplace lenders really don’t replace a bank service; they simply act as “intermediaries between bank customers and bank services.” In other words, the banking customers that get denied a loan often go to an alternative lender only to be linked to a form of financing initiated at a bank.
By linking a bank not only to P2P lenders but to the technology necessary to offer consumers and SMEs the alt-lending experience, Jollant argued that financial institutions will push out marketplace lenders altogether.
In fact, he said, it’s “inevitable.”
“They consolidated the market, they created that segment, they provided the first iteration of the technology,” he said of alternative lenders. “But I think, in the long term, as with many things we’ve seen before, their technology is now becoming a commodity, and the added value will be extremely hard to sustain.”
Once a P2P loan, like one a borrower would get from OnDeck or Lending Club, can be accessed through a bank, there’s no reason why a customer would ditch his or her bank for one of these alternative lenders. And while the AltFin space surfaced in response to SMEs struggling to get approved for a loan at their banks, Jollant explained that the addition of a P2P lending service will enable a bank to meet the borrowing needs of those that don’t meet requirements for their traditional loan products.
“The bank will win the game, hands down,” the executive declared. “Marketplace lenders will eventually disappear.” Sure, he continued, the “big guys,” like OnDeck and Prosper, will live on for a decade or two, fueled by the brand reputation and existing client base they’ve been able to establish. But for the rest of the market, be prepared to say goodbye.
“Ninety percent of the market will just collapse,” Jollant added. “These are no-names we’ve never heard of. I think, in the U.S. alone, the bulk of the market will just collapse because they cannot compete on price, on reputation, on services — it’s pretty much a no-brainer.”