Foreshadowing the Decline of Traditional Banks

A new world may rise over traditional banks by fundamentally transforming credit in the next few years. This is not only a consequence of the tightening of credit following the last global crisis,but rather the result of a fundamental revolution called Peer to Peer (P2P) lending or shared credit. This system does not rely anymore on banks which make loans much cheaper and easier to access. This is the very point which puts the challenge back in front of financial institutions After a thorough analysis of the topic, let’s review how the american financial giant sees the future of this emerging service.

Nowadays, if one needs a smaller loan, beside friends and family, the banks are the first place that to come to mind to provide such amounts. This situation may change rapidly according to the short term predictions contained in Morgan Stanley’s study. In the non distant future, such loans will be made available within a few minutes of pressing a few keys on a smart phone. Actually, such service is far from being science fiction, since it is already available in many regions around the globe, under the name of Peer-to-Peer (P2P) lending. P2P systems are such that they put loan applicants and lenders in direct contact, while collecting a transaction fee based on a percentage of the loan amount.

This system was invented for today’s consumers – first by targeting millenials – by satisfying both the needs of in a hurry borrowers and rewarding lenders. The fact that so many predicted the end of traditional banking, is also the reason which attracted more and more institutions and large banks into P2P lending.

Developing all around the world

“Marketplace lending” which is often called community or shared lending, is expanding at an incredible rate. In the U.S.A., the amount of approved loans doubled every year since 2010. But this is also true on a global basis, whether in Australia, China or the United Kingdom. This would amount between 150 and 490 billion USD by 2020.


Source: Morgan Stanley

Born in the Crisis

The global credit crisis was needed for such innovations to come to life. On one side, due to the size of their losses, the banks had to cut back more risky loans to individuals and small businesses, i.e., the very people who needed loans the most were unable to get any. On the other side, once the Fed and ECB dropped their base rates to close to zero in 2008-2009, individual savers were unable to earn normal returns for their savings deposits and started looking instead for other market participants willing to pay higher yields for “their deposits”. .

But this would not have been sufficient had proper technology requirements not been implemented in service platforms providing fast credit processing. Indeed, it is the substantial improvement in the speed of loan processing and mobile payments that made P2P lending so attractive.

The Future Remains Questionable

The biggest obstacle to P2P lending remains, however, remains the local regulatory environment. On one side, legislators are trying to keep up with new financial business models. On the other hand, almost more importantly, it is unclear how this technology will fare during an economic slowdown. The rise of the base rate by the Fed may indeed create new incentives for individual savers/small lenders to turn away from P2P lending in favor of other asset classes, which might concurrently cause a drop of demand for such type of loans.


Source: Morgan Stanley


Availability Not Uniform

The same wave that helped P2P Lending spread across the USA spread also globally, though not uniformly across different regions. In China, for example, the system developed both on-line and off-line with over 1500 platforms. Asian regulators, however, do not recognize such services as valid financial institutional services deserving access to central bank overnight lengind windows. As a result, the rate of defaults is particularly high with often double digit interest rates.

In Europe, P2P services are most popular in the United Kingdom: in 2014, 80% of European P2P activities were found in the island country. It is interesting also to notice that many British community lending services offer loan application processing services recognized by the banks, although their biggest advantage remain better interest rates and faster approval cycles.

Despite having started from the fringes of the banking industry, P2P lenders are rapidly reinventing the industry, the largest banking institutions are starting to endorse their benefits and ultimately the P2P vision may become core to the entire industry. Ultimately, consumers will become the beneficiaries .