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Marketplace Lending | a Temporary Phenomenon? A temporary phenomenon? Marketplace lending An analysis of the UK market Marketplace lending | A temporary phenomenon? Contents Foreword 1 Executive summary 2 1. What is marketplace lending? 4 2. Marketplace lending: a disruptive threat or a sustaining innovation? 8 3. The relative economics of marketplace lenders vs banks 11 4. The user experience of marketplace lenders vs banks 23 5. Marketplace lending as an asset class 24 6. The future of marketplace lending in the UK 30 7. How should incumbents respond? 32 Conclusion 35 Appendix 36 Endnotes 37 Contacts 40 Foreword Marketplace lending | A temporary phenomenon? Foreword As explored in Deloitte’s Banking disrupted All these are factors that add to the Our findings suggest that MPLs in the UK and Payments disrupted reports, and average cost of a loan. Many commentators are unlikely to pose a threat to banks in Deloitte’s The Future of Financial Services recognise the significant cost advantage the mass market. In the medium term, report, produced in collaboration with the that this will give MPLs and are highlighting however, MPLs are likely to find a series World Economic Forum, a combination of the resultant disruptive threat that MPLs of profitable niches to exploit, such as new technology and regulation is eroding represent to the traditional banking borrowing which falls outside banks’ many of the core competitive advantages business model. risk appetite and segments that value that banks have over new market entrants. speed and convenience enough to pay a These structural threats have arrived at This report is our contribution to this premium (for example SMEs, particularly a time when interest rates are at historic debate in respect of marketplace lending in invoice financing, or high-risk retail lows, and seem likely to remain ‘lower in the UK. It is based on extensive research borrowers). So while banks cannot afford for longer’. Combined with an increase in and analysis, including expert interviews to be complacent, they probably have more regulatory capital requirements, these and a survey of consumers and small to gain than to lose from implementing changes are making the goal of generating businesses in the UK, which aim to answer a strategy of effective collaboration and returns above the cost of (more) capital a the following questions: partnering with MPLs. continuing challenge. • is marketplace lending a temporary At the same time, customer expectations phenomenon? Does it constitute a are changing. Consumers’ experience disruptive threat to banks’ core lending of digital in industries such as retail, and deposit-gathering businesses in the accommodation and transport is UK market? Or is it, instead, a sustaining heightening expectations for convenience innovation, that does not fundamentally and immediacy. And consumers are change the financial services landscape increasingly willing to experiment with new but may instead drive improved providers, even for services where trust is performance and pioneer the provision required. This is creating ideal conditions of credit into previously under-served for technology-enabled entrants to segments? challenge the integrated banking model. Neil Tomlinson • what should (and can) banks do to react Head of UK Banking Marketplace lenders (MPLs) are leveraging to the emergence of the MPL model? all of these trends to attack one of the core profit-generating activities of commercial banks: lending. The MPL model is built around modern technology that enables Marketplace lenders (MPLs) are leveraging highly-efficient customer acquisition, approval and servicing activities within all of these trends to attack one of a relatively light-touch regulatory environment. Most banks’ operating the core profit-generating activities of models, by contrast, include legacy IT expenses, significant regulatory overheads commercial banks: lending. and the mature collections and recoveries function that is needed to service an aged book. 1 Executive summary Executive Marketplace lending | A temporary phenomenon? Executive summary MPLs do not have a sufficiently material source of competitive advantage to threaten banks’ mainstream retail and commercial lending and deposit-gathering businesses in the UK market. Marketplace lenders (MPLs) have recently Based on this research, Deloitte draws • our research suggests that most people gained prominence following rapid growth the conclusion that MPLs do not have a understand that lending money via an in markets like the UK, the US and China. sufficiently material source of competitive MPL is not comparable to depositing This growth, along with an apparent advantage to threaten banks’ mainstream money with a bank. This is largely due to investor appetite to provide them with retail and commercial lending and deposit- the fact that MPL investments are not equity funding and use them to channel gathering businesses in the UK market. covered by the government’s Financial funds directly into consumer and SME Critically, banks should be able to deploy Services Compensation Scheme (FSCS) lending, has led some to predict profound a structural cost of funds advantage to which protects the first £75,000 of disruption of the traditional banking model. sustainably under-price MPLs if it becomes deposits. There may be times in the cycle clear that the threat of lost volumes makes where supply constraints in the banking Unlike banks, which take in deposits and this the value maximising strategy. Three sector make certain areas of marketplace lend to consumers and businesses, MPLs key observations underpin this conclusion: lending a more attractive asset class. This do not take deposits or lend themselves. is unlikely to be an enduring advantage, They take no risk onto their own balance • any operating cost advantage that MPLs however, and the capital provided here sheets, and they receive no interest may have is insufficient to offset the is more likely to be deflected from fixed- income directly from borrowers. Rather, banking model’s material cost-of-funds income or equity investments rather than they generate income from fees and advantage. It is our view that in today’s from bank deposits. commissions generated by matching credit environment, the cost profiles borrowers with lenders. of banks and MPLs are roughly equal, meaning neither has a material pricing This paper looks at the potential for MPLs advantage. However, Deloitte also to take material share from banks’ core believes that banks will have a structural lending and deposit-taking businesses cost advantage over MPLs if and when in the UK market. It tests the hypothesis the credit environment normalises that, to be truly disruptive, MPLs would need to possess competitive advantages • although borrowers currently value that create real customer value for both the benefits of speed and convenience borrowers and lenders that incumbent offered by MPLs, these are likely to prove banks cannot counter. As part of this temporary as banks replicate successful research, Deloitte commissioned innovation in this area. In addition, YouGov to conduct consumer and small- Deloitte believes that borrowers who business research, and also spoke to are willing to pay a material premium to several UK marketplace lenders, banks access loans quickly are in the minority and investment managers. Deloitte also developed a UK ‘MPL opportunity- assessment model’, comparing the lending costs of banks and MPLs, and forecasting the future size of the MPL market. In this publication, ‘we’ and ‘our’ refer to Deloitte LLP, the UK member firm of Deloitte Touche Tohmatsu Limited. 2 Executive summary Executive Marketplace lending | A temporary phenomenon? We do not believe that the banking model So what, if anything, should banks do? in the UK will be fully disrupted by MPLs. Our fundamental view is that MPLs do not Based on our market sizing analysis, MPLs present an existential threat to banks and, will not be significant players in terms of therefore, that banks should view MPLs overall volume or market share in the UK. as complementary to the core banking However, we also do not believe that MPLs model, not as mainstream competitors. are a temporary phenomenon. They seem We therefore believe that banks can, and likely to become a permanent part of the should, evaluate a wide range of options landscape by performing at least two for enhancing their overall customer valuable functions: proposition by partnering with MPLs. Options might include: • they may provide supply into areas of the lending market where banks do not have • providing easy access to such platforms the risk appetite to participate, such as for borrowing that is outside a bank’s risk high-risk retail borrowers appetite • while the likelihood of a significant • keeping an eye on evolving credit models outflow of deposits from the banking system does not seem strong, MPLs • leveraging MPL technology to enhance may offer a low-cost option for certain the customer experience investors to gain direct exposure to new asset classes. • utilising elements of the MPL model to expand geographically without bearing the distribution and regulatory costs of the traditional bank model. We do not believe that the banking model in the UK will be fully disrupted by MPLs. However, we also do not believe that MPLs are a temporary phenomenon. 3 1. What is marketplace lending? 1. What is marketplace Marketplace lending | A temporary phenomenon? 1. What is marketplace lending? This section is designed as an introduction Unlike banks, which take in deposits This ‘embedded securitisation’ aims to to what marketplace lending (MPL) is and and lend to consumers and businesses, minimise the risk of default by spreading how the MPL model differs from the banks’ MPLs do not take deposits or lend lenders’ investments across a large number traditional lending model. It also provides a themselves. They therefore take no risk of borrowers. snapshot of the state of the MPL market in onto their balance sheets (see Figure 1). the US and continental Europe for Nor do they have an interest income, but MPLs generally update the risk-model comparison with the UK.
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