Marketplace lending

Article

Marketplace lending

A temporary phenomenon?

Does marketplace lending represent a disruptive threat to banks’ core lending and deposit-gathering business? Or are they a temporary phenomenon? And how should banks respond to these new market entrants?

Overview

The combination of new technologies, increased regulation and ever-evolving consumer demands is eroding many of the banks’ core competitive advantages, creating ideal conditions for new market entrants to challenge the traditional banking model.

‘Marketplace lending – a temporary phenomenon?’ analyses the extent to which the traditional banking model is being disrupted by the rise of Marketplace Lenders (MPLs) and seeks to answer the following questions:

  • Is marketplace lending a temporary phenomenon? Does it constitute a disruptive threat to banks’ core lending and deposit gathering business? Or is it, instead, a sustaining innovation?
  • What should banks do to react to the emergence of the MPL model?

What is marketplace lending?

MPLs are online platforms that enable investors to lend to retail and commercial borrowers. Unlike banks, MPLs do not take deposits or lend themselves; as such they do not take any risk onto their balance sheets. They make money from fees and commissions received from borrowers and lenders.

How should incumbents respond?

The rise of Marketplace lending has urged many commentators to highlight the potential disruption that such new business models may bring to traditional banking. Our research presents a different opinion and instead concludes that MPLs do not currently have the competitive advantage needed to threaten this traditional banking model. However, while they may not fully disrupt the model, we do expect them to be a continued presence within the ever evolving banking landscape.

We believe there is significant consumer benefit to be had by supporting the development of an innovative MPL sector. Banks should therefore view MPLs as complementary to the core model, rather than as core competitors, and explore opportunities to enhance their overall customer propositions through collaboration.

Marketplace lending as an asset class

The rise of marketplace lending may also present a unique set of opportunities for asset managers by providing access to a new asset class that will potentially offer higher returns and is gradually becoming more investible. This is largely because:

  • Securitisations and a secondary market for these loans will improve their liquidity
  • Asset managers can bring innovative funding vehicles, such as closed end funds, that can make them stand out vs peers
  • The involvement of asset managers will help ‘professionalise’ the sector
  • As more asset managers move into this market, we expect to see tighter regulation of MPLs, thereby broadening the appeal to a wider range of asset managers

However, as more asset managers get involved in this market, competition for these assets will rise, which may squeeze returns. Competition is also likely to force asset managers to increase exposure to smaller loan sizes and potentially riskier loans. Asset managers must therefore make sure this maps up with their capabilities.
 

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