Pymnts.com | May 24, 2016

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. 

See:

• Lifting the Veil on P2P Lending in Canada

• Acknowledging the Value of Lending Club, Even as It Stumbles

• Online Alternative Finance Market in the U.S. Surges to More Than $36 Billion in 2015: KPMG Report

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.

MPLs React

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.”

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