Marketplace lending 2.0

The story is more than marketplace lending and banks

The first report that the Deloitte Center for Financial Services released on marketplace lending in March of last year probed whether the convergence of banks and MPLs is inevitable. We learned that not only were they already converging, but more convergence was to come.

Today, we see a picture that is much bigger in scope than just MPL-bank convergence. Marketplace lending is an integral piece of a larger fintech puzzle that is transforming the financial services industry. We expect that asset classes such as small business, student, and the unsecured consumer will move almost completely to digital platforms in the medium term, while other asset classes, such as residential mortgages and auto lending will get there more slowly. The lenders and originators will likely continue to sometimes be separate entities, sometimes the same entity, and will include a variety of types, from banks to online nonbanks (MPLs) to other types of FinTechs to traditional technology firms, as well as various types of retail organizations and service providers, in a range of cooperative scenarios including partnering, merging, and lending as a service (LaaS).

Download the PDF to learn how marketplace lending will continue to evolve.

Examine the future, by asset class

In terms of sheer volume, unsecured consumer lending (which increasingly includes student loans) still often rules the marketplace lending landscape by a wide margin, with small business an up-and-coming second, yet other asset classes are also beginning to benefit in meaningful ways.

Small business
On the small business front, the Federal Reserve estimates that there is still unsatisfied demand in the hundreds of billions of dollars, and that marketplace lending has begun to make a dent by bringing renewed attention to the market that includes increased bank involvement in the sector either through their own efforts or through MPL relationships.

Residential mortgage
Currently, only four of the top ten mortgage lenders are banks, credit unions, or other depository institutions, compared to six in 2015 and eight in 2011. In fact, the three banks that accounted for half of all mortgage originations in 2011 now only account for 21 percent. The residential mortgage process still often requires reams of antiquated legal documentation and procedures in most states, so MPLs involved directly with residential mortgages have for the most part used their digital platforms to source customers and sell the loans to the large mortgage players.

Commercial real estate
On the commercial real estate (CRE) side, nonbanks have been investing in the CRE market for a while. Private equity, hedge funds, Real Estate Investment Trusts (REITs), and institutional lenders have created and developed, a deep nonbank market, so it is only natural that marketplace lending proliferates to make processes even easier for institutional investors.

Auto lending
Although auto lending is an asset class that may see a rocky patch in the near future, MPLs are nonetheless focusing on the aspects of it that are easily disintermediated. Namely, auto financing is still typically unnecessarily paper-based. Where retail mortgages have multiple parties (for example, bank, attorneys, inspectors, and appraisers) that make documentation complex, auto financing does not. Although often financed through a single dealer, the process is quite inefficient.