Alternative finance could make up less than one per cent of the lending market by 2025 if interest rates rise, according to new research by accountancy giant Deloitte.
The new report into marketplace lending – defined as both P2P lending and institutional investment that build on this model – was based on the results of a survey of consumers and small business owners.
It identified invoice financing as the most fruitful section of the market for alternative providers, and highlighted the benefits marketplace lenders have when it comes to processing and underwriting loans – advantages that come from the greater automation such services use compared to banks.
“A fully automated process for processing and underwriting loans allows marketplace lenders to avoid the material costs that banks have to deal with as a result of their legacy systems and multiple channels,” wrote the report’s authors.
“This also holds true for servicing where a surprising number of banks have, for example, no automated scoring systems for SME overdrafts – this results in a significant proportion of relationship managers’ time being taken up in renewing overdrafts.”
However, a comparison of the total cost of lending to small businesses by marketplace lenders compared to banks highlighted that central bank interest rates make up a bigger proportion of lending costs for alternative platforms.
“Marketplace lenders’ costs will rise by more than banks’ as the credit environment normalises and interest rates increase,” argued the report’s authors.
The study also shed light on the attitudes of small business owners to marketplace lending, with only four per cent of those surveyed users of alternative finance, though three-quarters were aware of bank alternatives.
Some 90 per cent of SME lending is currently provided by the bank with which the company’s business current account is held – something which the Deloitte report suggests poses a big challenge to customer acquisition by alternative platforms.
“Contrary to a number of commentators, we do not see marketplace lenders as a major threat to banks in the mass market. Borrowers like the benefits of speed and convenience of them, 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.
“While marketplace lenders look unlikely to grow sufficiently to displace banks, banks can benefit from adopting some of their best practices, particularly around customer experience. Unlike banks with legacy systems, marketplace lenders use modern technology, streamlined processes and innovative risk scoring that can make it quicker and easier to get a loan,” added banking partner, Ian Foottit.
“Collaborating with or acquiring marketplace lenders, banks can benefit from this enhanced customer experience to deliver faster, more convenient access to credit at a very competitive price point.”
Curious about what the alternatives are to traditional lenders? Don’t miss our guide to your options.
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