The impact of P2P lending on conventional banks

A working paper from staff at the Bank of England  “Peer-to-peer lending and financial innovation in the United Kingdom” looks at the P2P lending market in the UK. As well as looking at the geographic dispersion of lenders and borrowers, they also make some observations about the future impact of P2P on traditional banks. First, they expect to see a fall in the interest rate charged on unsecured personal loans, which will put pressure on bank profitability in this product line, and second, P2P platforms offer a model for banks as they shift their distribution channels from bricks-and-mortar branches to internet and mobile services.

Although there is P2P lending to fund businesses and real estate, we think consumer credit is the area where banks will face most competition from online platforms. In part, this is because it is the asset class in which P2P emerged and is most mature. For example, one striking fact to emerge from Nesta’s survey of the industry is the difference in the credit profile of individual and business borrowers on P2P platforms.

In the P2P market for personal loans, 59% of respondents sought funding from banks at the same time they applied for a P2P loan, and 54% were granted it but chose to fund themselves via the platforms. By contrast, in the market for P2P business loans, 79% sought funding from banks but only 22% were granted it. One interpretation of these results is that, while banks and P2P platforms are operating with different credit risk and lending models when it comes to business loans, P2P platforms are actually competing away some customers from banks in the unsecured personal loans market.

Looking ahead, unsecured personal loans are the market where P2P platforms are likely to continue to make inroads against banks. In contrast to the retail mortgage and deposit market, no British bank has a dominant position in consumer credit. In addition, British banks’ unsecured lending is typically a small component of their overall balance sheet.

The results of this competition could be good for consumers, increasing the availability of unsecured personal credit while lowering its price. This would amplify recent trends. Last year, UK banks increased their issuance of unsecured personal loans, and quoted interest rates on these fell sharply. However, we caution that P2P platforms still trail banks by some distance in terms of their share of the unsecured personal loans market. For example, in Q4 2014, the net lending flow to individuals through P2P platforms was just over £70 million, while those from UK banks and building societies topped £2 billion.

A second, longer term, less direct but still important impact we expect P2P lenders will have on banks is in how they interact with consumers. Over the last two decades, banks have taken steps to move their customers online to reduce costs from operating physical branches. By some estimates, 30 to 40 percent of retail banks costs in the UK come from running physical branches, even though footfall in them has been falling at 10 percent per annum in recent years, possibly because younger generations are more comfortable doing business just online. This means banks are likely to accelerate the transition of their customers from brick and mortar branches to Internet browsers. As this happens, we anticipate banks will look to P2P platforms for inspiration in how to redesign their websites, as these are often noted for being slick and speedy because, for example, they incorporate videos, pictures and communication channels for investors to interact with borrowers.

Note: Staff Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Any views expressed are solely those of the author(s) and so cannot be taken to represent those of the Bank of England or to state Bank of England policy. This paper should therefore not be reported as representing the views of the Bank of England or members of the Monetary Policy Committee, Financial Policy Committee or Prudential Regulation Authority Board.

 

Author: Martin North

Martin North is the Principal of Digital Finance Analytics

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