Marketplace lending is one of the fastest growing areas in fintech and is tipped to be the next big thing. Over the last eighteen months growth in marketplace lending, which according to reports is the new buzz word for peer-to-peer (P2P) lending, has risen significantly with Morgan Stanley predicting that marketplace lending will reach $290 billion by 2020.
Marketplace lending has gone from alternative to mainstream within the last few years and with successful companies such as Lending Club and On Deck in the US and RateSetter and Funding Circle in the UK, enabling businesses and individuals to secure loans directly from investors online, rather than having to going through banks, this lending approach is becoming much more widely accepted and has caught the attention of both banks and regulators.
According to figures from the P2P Finance Association, between April and June £500m of new consumer and small business loans were provided by P2P platforms, and according to Morgan Stanley’s research paper on the sector, in Europe small business and consumer lending will produce a total market of £100 billion by 2020.
In June, the US Treasury Department opened a study into the online marketplace lending industry asking for information about the benefits and risks associated with new online lending platforms. In the UK, the Financial Conduct Authority (FCA) has raised concerns about P2P lending and chairman John Griffith-Jones recently said it was starting to look a lot like banking, according to the FT.
Investment into marketplace lending platforms has also increased in recent years. Avant raised £325 million in funding this week which follows similar investments made this year into other marketplace lenders such as lternative finance start-up SoFi, which received $1 billion from Softbank earlier this month and the aquisition by UK Peer-to-Peer (P2P) lender Funding Circle of German marketplace lender Zencap, a few weeks ago.
History, benefits and challenges of marketplace lending
According to reports, marketplace lenders previously called themselves peer-to-peer lenders because the initial concept was to connect those looking for a loan with individual lenders, however, much of the capital is now being lent by institutional investors.
Lending money directly to real people seeking a loan creates a streamlined online matching process and gets rid of the need to choose between putting money into low-return options such as bank savings accounts or bonds and diminishes the negotiation of the volatile stocks and shares market.
According to the Morgan Stanley report into the sector’s growing importance, partnerships with banks and credit card lenders will be necessary to help raise customer awareness. “Partnerships will likely be the key battleground for marketplace lenders to drive down the cost of customer acquisition and expanding distribution, just as they have been for credit card companies.”
The report also says that marketplace lenders have benefited from post-crisis regulations that have increased the cost of capital for banks and can offer more competitive rates. Platforms have been allowed to operate under interim permissions since April 2014, and had until end of October to apply for full FCA authorisation.
Alongside regulators, banks have also started to take more notice of the growth of the sector and some have started buying loans from platforms and buying platforms themselves to speed up front-end operations. However, according to the report, marketplace platforms are not yet viewed as meaningful competitors by all banks.