RESEARCH

Can P2P Lending Reinvent

Banking?
Jun 17, 2015
Marketplace lenders have proven that they're more than a
passing fadand traditional banks are taking note.

Morgan Stanley Blue Papers, a product of our Research Division,

involve collaboration from analysts, economists and strategists
across the globe and address long-term, structural business changes
that are reshaping the fundamentals of entire economies and
industries around the globe.
Need to borrow a not-insubstantial sum of money? Some
options that may spring to mind: the friends and family plan,
maxing out credit cards, or the traditional bank.
Now, imagine you could whip out your smartphone, answer

some simple questions on an app, offer basic bona fides, and

get an answer within minutes. If the latter sounds appealing,
that could explain why, over the past several years, peer-to-peer
lending has swelled in popularity.
P2P lenders have leveraged low operating costs, minimal
regulations, Big Data and technology streamlined for a mobile
generation to mediate terms between everyday borrowers who
want quick access to cash and the lender-next-door starved for
yield. It's a fast-growing financial model, with global variations,
that some have predicted could upend the traditional banking
industry. Right now, however, it is attracting institutional
investors, as well as big banks eager to learn how to become
more agile.

Global Reach and Growth

These days, marketplace lending" is a more fitting term for
this evolving business. The fastest growing marketplace
platforms are not really peer-to-peer but institutional investors
partnering with tech platforms to cherry-pick borrowers, often
with offline marketing," says Smittipon Srethapramote, who
covers the North American payments industry at Morgan
Stanley.
In the US, marketplace loan origination has doubled every year
since 2010, to $12 billion in 2014. Meanwhile, the trend is
playing out globally, notably in Australia, China and the UK. Alltold, such lending could command $150 billion to $490 billion
globally by 2020.
Global Marketplace Loan Issuance ($bn)

26
24
22
20
18

18
16
14
12
10
8
6
4
2
0

1.4

2010

2011

2.4
2012

Source: Company Data, Morgan Stanley Research estimates

That would still be but a sliver of total bank lending, yet

traditional lenders are taking note. Whether they roll out their
own offerings, upgrade existing platforms or invest in
established marketplace lenders, banks will be forced to
provide a similar level of service and price, if they hope to
compete and stay relevant to their customers," says Huw van
Steenis, head of Morgan Stanley European financial services
research.
So far, marketplace lenders have focused on unsecured
consumer credit, with roughly 80% of loans used to consolidate
debt, and small business loanswith an estimated $100 billion
in unmet demand solely in the US. But don't be surprised to see
these lenders make a play for the $1.2 trillion student loan
market, auto loans and even mortgages. "It's still more
theoretical than proven," says Srethapramote of a marketplace
for mortgages, "but the value proposition makes sense to us."

Born From Crisis

The global financial crisis paved the way for innovators. Heavy

2013

losses forced banks to scale back on riskier consumer and

small business lending, as increased regulatory oversight and
capital requirements made these loans less attractive to
banks. Years of historically low interest rates, meanwhile,
whetted investor appetite for alternative sources of yield.
Meanwhile, Big Data and improved analytics made it possible
for tech-driven platforms to identify borrowers and make quick
lending decisions. Where traditional lenders have to follow
laundry lists of requirements to vet applicants, marketplace
lenders are using propriety algorithms to make snap
judgments. One of the driving factors behind the growth of
online lenders is better customer satisfaction due to faster
response times, quicker loan approval times, and faster
funding," notes Srethapramote.
P2P Lender Awareness and Use (by age)

100

90

80
52%
70

65%
75%

60

50

40

18%

30
22%
20
30%

23%

10
13%
0
Ages:1834

Ages:3555

Ages:55+

Source: AlphaWise, Morgan Stanley Research

Marketplace lenders enjoy the advantages of the financial

system, without its costs. They have no capital requirements,
can leverage the existing payments infrastructure virtually for
free, and have lower operating expenses, all of which allows
them to offer borrowers lower ratesfor a fee. "Banks are keen
to learn how marketplace lenders are architecting their
systems to utilize big data more efficiently," says Betsy
Graseck, who covers US Large Cap Banks at Morgan Stanley.
Creating a tech platform that is as fast and nimble as the
upstarts will take time. Traditional banks excel at originating
loans and underwriting credit, but are slowed by the batch
process and portfolio approach to their deposit and loan legacy
systems, which are the backbone of the US and global
payments system, and by liquidity and capital rules. "By far the
biggest advantage for marketplace lenders has been the lack of
capital and liquidity requirements relative to the incumbents,"
Graseck says.
For marketplace lenders, the regulatory environment remains a
question mark, as financial rule-makers play catch-up with the
latest technology. Another wildcard is how this model would
fare in an economic downturn; it's yet to be tested in a
meaningful way. Finally, any rise in interest rates could send
investors to other asset classes, many of which provide more
certainty, or curb borrowers' appetite for new credit.

Global Opportunities and Challenges

The same trends that have put US marketplace lending on the
map are playing out globally, though there are notable nuances.
In China, for example, marketplace lending operates both
online and offline. It is also extremely fragmented, with more
than 1,500 lending platforms, estimates Richard Xu, Morgan
Stanleys China financial sector analyst. These lenders aren't
recognized as regular financial institutions, and don't have

access to the China's central-bank credit reference database.

Consequently, delinquency rates are highalong with interest
rates, which are in the double digits.
Another market to watch: Australia, where household leverage
is high but limited primarily to residential mortgages.
Meanwhile, just four banks control 75% of the retail banking
market. Recent changes in credit reporting, among other
factors, bode well for innovators, says Richard Wiles, Morgan
Stanleys Australia banking analyst.
In Europe, the UK market is leading the way, accounting for 80%
of European marketplace loans in 2014. Platforms are privy to
in-depth credit information, similar to that of the US, but they
can include demographic data in their analysis. Interestingly,
the typical borrower is older than his US counterpart and, in
many cases, has already been approved by a bank to borrow,
but opts for the better rate and faster execution from
marketplace lenders, van Steenis says.
Global Marketplace Loan Issuance ($bn)

300

250

200

150

115.3
100
73.8

50

9.9
33.2
54.2

8.9
12

0
2010

2011

2012

2013

2014

23.2
2015

36.7

2016

54.2

2017

2010-2014: Compound Annual Growth Rate of 123%; 2015-2020: Expected

CAGR of 51%
Source: Company Data Morgan Stanley Research

Marketplace lenders may have started on the financial fringe.

However, as they increasingly change the way borrowers and
investors think about the lending process, institutional
involvement and big bank interest could speed their journey
into the mainstream.
That can only be good news for anyone who's in the market for a
loan.
Morgan Stanley Research has written a Blue Paper, Global
Marketplace Lending: Disruptive Innovation in Financials" (May 19,
2015). Morgan Stanley and its affiliates do not engage in marketplace
lending. Explore more Ideas and Research, or contact your Morgan
Stanley representative for the full report. Find a Financial Advisor to
discuss your investment goals and strategy.