Marketplace lending - A temporary phenomenon?

Here is the industry's response, as published by Business Insider:


uk.businessinsider.com/deloitte-report-on-marketplace-lending-peer-to-peer-lenders-react-2016-5


Including a response from RateSetter's Rhydian;

"We agree with Deloitte about the importance of cost of funds and we designed our model with this in mind. Our Provision Fund is building up a surplus which will reduce risk - over time, as people see lending as less risky, the risk premium they require for their investment will decrease, meaning that we can compete more effectively with banks’ cost of funds.

At the same time, as we scale up – we think this means being about three times bigger – our efficiency advantages will really begin to bite. Some banks will never get free from their legacy costs, which means they will struggle to ever offer any value to customers."

I thought the Deloitte piece underestimated bank costs associated with:-

1.  Ongoing and increasing regulatory costs - whilst the P2P industry will definitely see increased regulatory costs I doubt they will ever match the historical (and continuing to increase) regulatory costs banks carry.
2.  Cost of capital - as deposit taking institutions with a "borrow short lend long" business model banks will always have to carry a lot more capital than a P2P industry with an equivalent sized lending book, and may have to pay more for that capital.  They might be able to get more deposits cheaper, but they also need a lot more of them.
3.  Historical (and ongoing) infrastructure costs - it underestimates the advantage that the P2P industry has gained by "starting with a greenfield site".  For instance, at the moment RBS is months late, millions of pounds over budget, with ten percent of its workforce, in terms of splitting off Williams & Glynn (an EU requirement resulting from the state aid provided in 2008).  Why?  Because they can't get the IT to work.  I worked in investment banking, where the IT was a lot newer and better designed than the systems used by retail banks, but even there it was pretty shabby in some places.  The core systems used by the large extant retail banks are in appalling shape, and they industry has, if you can believe it, significantly under-invested in this space over the last decade or so.

Yes, indeed. Which brings another interesting question: if p2p lending platforms have no money creation powers, then where will the loan interest come from? It will have to come from money created by other means, or the whole system collapses. Now, we all know inflation in EU is very low, while many p2p platforms offer 12% (and charge borrowers considerably higher).

Note however that some P2P platforms have visible IT and operational problems.