The alternative finance market for SMEs and personal loans, through marketplace lenders, has in the space of just five years, grown from almost nothing to £2.7 billion. The rapid rise of the phenomenon may mean that banks need to take care or lose out to a new, more attractive, model. New analysis, however, suggests that it is mainly the current credit environment that makes MPL propositions more attractive than those of banks – an environment that is likely to face change.
The disruption of traditional business models, through new technologies and digital business models, has the potential to see incumbents rapidly lose market share. One recent area that has garnered attention from analysts is the phenomenon of marketplace lenders (MPLs) providing an easy means for peer-to-peer lending across a range of segments – resulting in a boom in the alternative finance market in recent years.
While large, corporate players, tend to be able to access debt through capital markets, smaller companies and consumers have traditionally needed to rely on backs to access credit. Banks, are relatively more expensive and risk adverse than the capital markets, which has resulted in more expensive loans for small businesses and consumers.
In recent years, the development of digital technologies has allowed lenders and borrowers to more easily find one another through MPL services. The MPL services connect lenders with borrowers without themselves, outside of fees and commissions, being responsible for the loans closed between the respective parties.
Rise of MPLs
In recent years, the phenomenon of MPLs has grown rapidly – jumping from $473 million in such loans across the US in 2011, to almost $22 billion in such loans in 2015. The CAGR within the industry suggests that a disruptive phenomenon may be unfolding, as total CAGR for the period hit 163.3%. In a new report from Deloitte, titled ‘A temporary phenomenon? Marketplace lending’, the professional services firm considers whether the peer-to-peer lending market through MPLs is likely to become a disruptive force to the banking industry within the SME and consumer lending segments.
As it stands, the UK has, much like the US, seen comparatively rapid expansion within the sector over recent years. In 2011 the sector leant £91 million, largely to the consumer market. Since then, however, the sector has grown at CAGR 171.6%, with the SME market last year worth £1.6 billion and the consumer lending market worth £1.1 billion. The UK market, relative to the wider EU market, is considerably more developed – in total across the continent €669 million in peer-to-peer loans have been leveraged.
The report notes, however, that, as a % of total loans, MPL lending remains relatively low in the UK, accounting for slightly less than 1% of consumer loans in 2015 and just over 0.5% of SME lending.
Drivers behind MPLs
The report also sought to identify what the main drivers for the use of MPLs are for borrowing money among consumers. Ease and quick turnaround are the most cited reasons by respondents, 81% say that one of the main drivers is an easy/quick application process, with 72% saying that it is the fast decision-making that makes the use of MPLs attractive. Additionally, MPL services offer competitive rates, and repayment flexibility – attracting a wide range of price conscious customers.
The consultancy firm further explores whether the MPL business model is really of sufficient improvement on that of the traditional banking proposition, to give rise to a ‘disruptive’ shakeup of the SME and consumer lending market. As it stands – within the current banking environment – the cost of an unsecured personal loan comes in at around 815 bps at banks, while at MPLs total costs stand at around 800 bps. For retail buy-to-let mortgages the bps for loans comes in at 460 for MPL and 500 for banks, while for SME loans, MPL can offer solutions at around 720 bps while banks offer loans at around 715 bps.
The relatively close cost profiles of banks and MPLs, as well as some of the benefits related to the use of MPLs, means that the service has had the opportunity to grow in recent years.
The current market conditions are, in many ways, abnormal. Interest rates remain at historic lows, while QE and other measures continue to operate across Europe. The researchers consider whether the current financial environment, rather than a disruptive new business model, is the main driver for the rise of MPL.
As part of the research the Big Four firm considers the total cost of attracting the required funds for the respective loans. For banks, a large portion of the loan is not sensitive to changes in rates, at around 270 bps, while for MPLs around 90 bps is not sensitive to changes in rates. This means that, as a proportion of the total bps of the loan, the credit environment disproportionately affects MPL loans – mainly in terms of return to lenders whose money is on the line. When, and if, the UK, European and US rates again begin to see relatively significant increases, the higher proportion of interest sensitive loan costs will disproportionately affect MPLs, seeing an unsecured loan increase from 470 bps to 530 bps for banks, while for MPLs the increase is from 635 bps to 795 bps.
Neil Tomlinson, Deloitte UK head of banking, says that MPLs are unlikely to become a disruptive force in the long-term, "More broadly, our research shows that total funding costs for banks are lower than for MPLs, and the interest rate-sensitive component of an MPL’s funding profile is higher than that of banks. On that basis, MPLs’ costs could rise by more than banks as the credit environment normalises and interest rates increase. Despite the challenges, MPLs do have an opportunity to carve out a niche market and can do so by exploiting their market-leading user experience and boosting word-of-mouth recommendations. These benefits could decrease customer acquisition costs, making MPLs a more viable option. As more MPLs become fully authorised by the FCA, issues surrounding trust and security could lessen. In turn, we may well see banks become more open to partnering with them to enhance their overall customer proposition.”