A major new report on peer-to-peer lending hit our desks on Monday. Consulting firm Deloitte analyses the sector, and concludes that disruption will be minimal, and the banks will continue to control the business, or almost all the important business.
We think it's worth our while looking in depth at the issues raised in this report, and we will offer follow-up articles from different perspectives (not just Deloittes's). Extracts of guest articles on this topic have featured in our daily news briefing. Get early access to the news and views by signing up here for this free premium content feature.
We begin with a guest article from the founder of a lending platform. Lee Birkett is CEO of eMoneyUnion . How does he feel about the predictions?
I have just read a report from Deloitte's "Head of UK Banking" which questions how effective a challenge peer-to-peer lenders will mount on the established order. I believe this piece – which obtained significant media coverage – deserves some scrutiny.
Now, call me an old cynic, but it does read a little like a pitch for work.
In my opinion, the report reads very much as a "don't worry boys - you are too big to be challenged" and suggests that if the disruptive minnows become a real threat, you can just buy them out.
The elephant in the room for all banks - including the challengers - and not addressed adequately in the report, is regulatory capital. Surely this is a critical issue?
The FACT that the Banks have "an increase in regulatory capital requirements" is almost mentioned in passing.
The authors then go on to cheekily suggest something which is NOT FACT: that P2P platforms are likely to be given "higher capital adequacy ratios"
Let's just take a quick look at the simple numbers as they stand today.
If an institution has £5 BN of mortgages and loans on its books.
- A bank's Tier 1 Regulatory Capital as at 2015: 11%* = £550M
- P2P: FCA Regulatory Capital set from 2017: 0.1%** = £5M
On a growing £5 BN mortgage and loan book, that's a pretty big difference. 10.9%/£545 million cash/capital difference.
The fact is that P2P platforms can grow their loan books without the substantial regulatory capital restraints that the banks have to put aside, it's that simple.
Where do you think borrowers are more likely to access their loans and mortgages in the future? their mobile phones via P2P or via an old school bank model based on the numbers above?
I think one of our nation's most successful investors, Neil Woodford, has it spot on. He has invested heavily in Fintech, P2P and alternative finance and pulled away from banks.
"Banks have been weak for almost the entire period since the global finance crisis commenced" [Woodford Funds - Banks – still far from normal]
It will be interesting to read Deloitte' report in 5 years time!
Another Crowd thanks Mr Birkett and eMoneyUnion for permission to reproduce this article.