The way in which brokers disrupted the lending market has been cited to support the view that peer-to-peer (P2P) lenders are poised to do the same.
A new report from Morgan Stanley has forecast that peer-to-peer lenders “could win meaningful share” from the incumbents – in much the same way that brokers did after entering the market.
“The impact on home loans was significant and immediate, with margins falling 200 basis points within two years,” the report said.
“Disruption from mortgage brokers has had a material impact on the structure of the mortgage market and the margins that major banks earn on their home loan portfolios.
“Brokers were able to offer lower interest rates, address customer perceptions that the major banks did not provide choice, and access alternative sources of funding to grow their business.”
One reason the Morgan Stanley report expects the peer-to-peer sector to grow is that the major banks have placed greater emphasis on mortgages and deposits than on consumer unsecured lending.
Another reason is the growing margins and high returns in unsecured consumer lending.
The report also argued that while there has been significant product innovation in mortgages in the past two decades, the features of unsecured personal loans have hardly changed.
Consumers therefore have little reason to choose banks if they expect peer-to-peer lenders to offer better pricing and service.
Despite Morgan Stanley offering a positive assessment of the potential of peer-to-peer lending, it also noted that the big banks have the financial strength to replicate the technology and pricing of peer-to-peer lenders should they want to.
Matt Symons, chief executive of peer-to-peer lender SocietyOne, said there is no doubt the banks are taking a look at the sector and wondering how to respond.
“I think one of the challenges is that classic sort of innovator’s dilemma,” he told The Adviser.
“You’ve got a very profitable back book, you have a small potential threat but that hasn’t actually emerged today, so do you capitalise on your very healthy margins to see off something that may or may not be a problem tomorrow or do you focus on banking the profits today?”
Mr Symons said it would be logical for the banks to focus on maximising their short-term profits while waiting to see how the peer-to-peer market evolves.