Can banks survive marketplace lending?

Marketplace lending (or P2P lending) emerged from the rubble of the global financial crisis. Originally, it was a small industry of people seeking finance opportunities outside traditional banks.

Today, the industry is enormous. A 2015 estimate valued the marketplace lending world at $26 billion with an expected value of $897 billion by 2025.

Initially, many questioned the sustainability of the model. Now, more than a decade into its life, marketplace lending is here to stay. In fact, this fintech solution has been so successful that some have started to question how traditional banking models will compete or even survive in the future.

In this piece, we ask if banks can survive marketplace lending by exploring:

  1. How marketplace lenders compete with banks.
  2. How marketplace lending is diminishing the role of banks.
  3. How banks and marketplace lending might coexist.

How marketplace lending compete with banks

Conventional bank loans require lengthy vetting processes, slow credit checks, and mounting fees. P2P lending avoids these problems. The digital infrastructure needs no brick and mortar footprint. Therefore, operational costs are lower.

Meanwhile, P2P firms can move fast given the availability of credit information on the borrower. Some studies show marketplace lenders can operate at costs 60% lower than traditional banks.

These two key benefits of speed and affordability appeal to today’s younger borrowers. The new global workforce consists heavily of Millennials born between 1982 and 1997. This demographic understands and trusts technology.

At the same time, an older demographic is also seeking tech-enabled solutions to finance. Why? Because many countries simply lack the availability of banks. “About 2.5 billion adults lack access to formal financial services,” reports the World Bank. Marketplace lending solves this problem.

On the other side of the transaction are the lenders. Investors seeking diversification and growth opportunities are turning to P2P lending by financing loan requests. The growing popularity of marketplace lending is driving annualized returns for investors. As recently as 2014 a U.S. index of online lenders reported a return of 8.71%.

At Bondora, 89% of investors have earned over 10% annually. Investors can earn a return while managing risk by allocating their investment across dozens or hundreds of borrowers of different credit rankings.

Today, investors have originated more than $100 billion in P2P loans across the globe. As this trend continues, banks are questioning their role in the future of finance.

How marketplace lending is diminishing the role of banks

Banks have experienced a decrease in small business loan financing. “10 of the largest banks issuing small loans to business lent $44.7 billion in 2014, down 38% from a peak of $72.5 billion in 2006,” reports the Wall Street Journal. In the same period, non-bank lenders saw their market share increase from 10% to 26%. More people are walking away from banks and stepping into alternative financing.

Even the head of small business banking at TD admitted, “We all struggle to make money on the lending side.” The numbers support his claim; Since the financial crisis, the volume of small-business loans issued from banks has fallen by one-fifth.

Traditional banks are voluntarily exiting small business loans as P2P lenders claim more market share. With higher overhead costs they’re unable to profit from these loans. In today’s world competition moves fast. Small businesses need capital immediately to innovate and keep pace with changing industries. Marketplace lending can move just as quickly.

At the same time, the unsecured consumer lending market is growing in the P2P industry. In the U.S. alone “The largest online marketplace platforms originated over $5.0 billion of unsecured consumer credit in 2014 and over $10.0 billion in 2015,” reports the U.S. Dept of The Treasury.

It’s no wonder a survey from PricewaterhouseCoopers determined that 76% of respondents consider marketplace lending to be “important” or “very important” to the future of the banking sector over the next five years.

In response to mounting competition online, banks are exploring how they can embrace this innovation rather than fight it.

How banks and marketplace lending might coexist

Today, the line dividing P2P lenders and banks is blurring. In fact, “fintigration” has become a popular term for the growing partnership between banks and fintech. Banks will not disappear. However, their role will change because adaptation is critical to survival. “More than 90% of bankers project that Fintech will have a significant impact on the future landscape of banking,” finds a study from The Economist.

In short: banks can survive marketplace lending but only if they adapt.

This survival will likely come from partnerships between banks and marketplace lenders. The bank’s benefit of such a collaboration seems clear. The bank can leverage the popularity of online solutions to gain more customers and improved operating efficiencies. Meanwhile, some P2P businesses will benefit from the resources, scale, and built-in customer base of banks.

Banks need marketplace solutions, but P2P might not need banks.

Partnerships like this have a long way to go. Banks are only now beginning to rediscover their role as marketplace lending casts a bigger shadow. In the meantime, speed, service, and low costs continue to resonate with P2P customers.