MPL Blog_730x355

A perfect storm

In the wake of the global financial crisis, UK banks pulled back from lending, owing to higher regulatory capital requirements and greater regulatory and shareholder scrutiny of their business models.  They have adopted more risk-averse lending strategies in this environment, with more stringent reviews of the creditworthiness of borrowers.

Furthermore, the low-interest rate environment brought about by the global financial crisis has made it challenging for savers and investors to generate satisfactory returns. This has led investors to explore other investment options in a quest for yield.

These factors have created the conditions for the marketplace lending model to gain traction in the UK.

From P2P to MPL

This was initially facilitated by platforms enabling retail borrowers and investors to contact each other directly, or ‘peer-to-peer’ (P2P). More recently, institutions have begun to invest in bundles of loans, prompting the sector to be described more accurately as ‘marketplace lending.’

Unlike banks, which take in deposits and lend to consumers and businesses, MPLs do not do not take deposits or lend themselves, and therefore are not taking risk onto their own balance sheets. They instead generate income from fees and commissions received from borrowers and lenders, rather than receiving interest income from borrowers directly.

Marketplace lenders have experienced strong growth, with a compound annual growth rate (CAGR) of 109.4 per cent between 2010 and 2015 in the UK.i However, despite strong growth, MPLs currently account for just a small proportion of the total consumer and small and medium-sized enterprise (SME) lending market in the UK.

Up to now, growth has been mainly driven by external factors. The UK government seeks to encourage competition in financial services, and the development of fintech in particular. Historic low interest rates have also stimulated a search for yield that regular deposit accounts cannot satisfy. Both borrowers and lenders are also increasingly drawn to the intrinsic qualities of the MPL model. Borrowers are attracted to the customer experience, while lenders appreciate access to a new asset class.

In terms of business model, MPLs benefit from innovative technology that enables highly efficient acquisition, approval and servicing of loans. By contrast, most banks’ operating profiles include legacy IT expenses and significant regulatory overheads.

MPLs have changed the narrative

Many commentators are now talking about the disruptive threat that marketplace lenders create for banks in the UK. Lending is one of the core profit-generating activities undertaken by retail banks. The net interest margin obtained as a result of managing spreads is the main source of income for a retail bank.

Lending is also strategically important. It cements the customer relationship, particularly in business banking, by:

  • generating more data about the customer, so that products are better matched to customers and better priced, e.g. ensuring the rate charged adequately reflects the risk
  • creating cross-selling opportunities
  • generating stickiness e.g. prevent customer switching to another bank.

For these reasons, we decided to examine whether or not MPLs truly represent a disruptive threat to UK banks in the lending space in our report “Marketplace lending – a temporary phenomenon?”

More can be found in our report. Below is a list of eight things you might not know about marketplace lending in the UK.

Eight things you might not know about marketplace lending in the UK

  1. The world’s first MPL was founded in the UK in 2005.
  2. Most platforms split money invested by lenders into smaller “tranches” and lend out to several borrowers.
  3. MPL-based consumer lending in the UK grew at 81.2 per cent a year between 2010 and 2015.
  4. SME lending (including invoice trading) via MPLs experienced even faster growth, growing at 6 per cent a year during the same period.ii
  5. The total number of active borrowers using UK MPL platforms almost doubled in 2015 alone.iii
  6. MPL investors do not have access to the Financial Services Compensation Scheme (FSCS), which protects the first £75,000 of deposits.
  7. Just over half of consumers and three-quarters of SMEs are aware of MPLs.iv
  8. Marketplace loan products are now eligible for investment in Individual Savings Accounts (ISAs) through the Innovative Finance ISA (IFISA), launched on 6th April 2016.v

Explore further analysis of the marketplace lending industry:

 

Margaret Doyle_110x110


Margaret Doyle - Partner, Head of Clients & Markets, Financial Services and Real Estate, Deloitte

Since Margaret joined Deloitte in 2012, Margaret’s team has published reports on deleveraging, culture, talent and technology in banking, on the impact of the Retail Distribution Review on investment products and advice, and on regulatory strategy in insurance. She started her career as a strategy consultant with McKinsey & Company before moving into financial journalism. She wrote for The Economist, The Daily Telegraph and Reuters Breakingviews, and edited Global Agenda, the official Davos magazine. Alongside this, she presented many top BBC radio programmes, including Today, and has been a frequent commentator on financial and current affairs, most frequently on BBC1, BBC News and Sky News. She was interviewed by Jeremy Paxman on Newsnight and has also spoken at, or chaired, conferences for a variety of organisations including: Economist Conferences, the European Commission, the Financial Services Authority, Holland Financial Centre, Enterprise Ireland, Allen & Overy, ING, Procter & Gamble, the Insurance Institute of Ireland and Trinity College, Dublin. She was an Entrance Exhibitioner and Foundation Scholar at Trinity College, Dublin and a Fulbright and Baker Scholar at Harvard Business School (HBS). She serves on the HBS European Advisory Board.

Email | LinkedIn

Cem Turan_110x110


Cem Turan - Manager, Retail Banking Insights, Deloitte

Cem Turan is a Manager and Head of Retail Banking Insight at Deloitte UK. Cem has an MBA in Finance from the University of Pittsburgh and a Bachelor's in Economics from Pennsylvania State University. A native of Istanbul, he is fluent in English and Turkish as well as conversant in German and Italian. In his current role Cem is working to drive development of pan-European thought leaderships on retail banking and fintech.

Email | LinkedIn 

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i Liberum AltFi Volume Index, AltFi Data, data as of 26 February 2016. See also: http://www.altfi.com/charts/charts/uk-volume_chart.php; Bank of England; Deloitte analysis
ii See endnote i
iii Aggregate P2PFA member data, 4th Quarter 2015, P2PFA, 2015. See also: http://p2pfa.info/data
iv YouGov plc 2016 © All rights reserved, Deloitte analysis
v Individual Savings Accounts (ISAs), GOV.UK, 6 April 2016. See also: https://www.gov.uk/individual-savings-accounts/overview

Comments

  • This is very nice "Eight things you might not know about marketplace lending in the UK". Your thought and details information from P2P to MPL is very important & it is very helpful.

    Posted by: Mark David on 30/08/2016

  • Insightful Article indeed!.
    You make some good points about Peer to Peer (P2P) Lending and about it's marketplace that I never thought about.
    Thanks for sharing!

    Posted by: John on 08/12/2018

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