The recent popularity of marketplace lending (MPL) is more than just a temporary phenomenon but it does not pose an existential threat to traditional bank lending, a report from Deloitte into the sector has argued.
Deloitte’s MPL report outlines four scenarios of what the MPL market may look like in 2025. Identifying two variables, existing interest rates and banks’ reaction to the market, the report shows that the most favourable outcome values the MPL industry at £35.5 billion (€46 billion; $51.4 billion). However, if interest rates normalise and banks respond to developments, the report argues that the market value of the industry could be as low as £500 million.
Citing the best-case scenario for MPLs, the report states that the alternative lenders will “not be significant players in terms of overall volume or share”.
“We do not believe that marketplace lending will fundamentally disrupt or displace banks’ core function as lenders in the mass market,” the report said.
Deloitte estimates that marketplace lenders originated £2.7 billion worth of loans in the UK last year, a small sum compared with the US, where the accountancy firm said that US MPLs have financed loans totalling $23 billion. Across the rest of Europe, the MPL sector lags behind. In 2015, just €669 million of loans were originated from MPLs, with France and Germany leading the way.
In the US, the MPL industry has entered a tumultuous period. Earlier this month, LendingClub, the largest US-based MPL, removed chief executive Renaud Laplanche following the announcement of a review into a $22 million sale of near-prime loans he was involved in and a failure to notify the firm of conflicts of a transaction the MPL was eyeing up. Prosper, another US-based MPL, recently announced it will slash around a quarter of its workforce.
MPLs hold an advantage over banks in providing convenience and immediacy to investors seeking exposure to certain asset classes and generally have a lower cost base. Their income is generated from fees and the commission from matching lenders to borrowers.
But while the Deloitte report concluded that MPLs are here to stay, the accountancy firm does outline a number of limitations for MPLs in competing with banks. It noted that banks are increasingly able to replicate the speed of MPLs and that only a small number of borrowers value the quick access to loans. The report concluded that banks would benefit from partnering with MPLs in the future.
“Contrary to a number of commentators, we do not see MPLs as a major threat to banks in the mass market. Borrowers like the benefits of speed and convenience of MPLs, but those willing to pay a material premium to access loans quickly are in the minority,” said Neil Tomlinson, head of UK banking at Deloitte.