Peer to Business Lending
Alternative Finance Sector Report - October 2014 9
PEER TO BUSINESS LENDING
ALTERNATIVE FINANCE SECTOR REPORT
PUBLISHED
November 14
AUTHOR
Luke Jackson
Samantha Goins
24 -
Based on a comparison between the
average US bank and US based lender
Lending Club, directly comparing
the costs of P2P loans to bank loans,
there is a huge difference in overheads
and costs. The cost per loan for the
average outstanding bank loan is 6.95%,
compared to only 2.7% for outstanding
P2P loans. P2P lending platforms do not
have expensive branches, huge numbers
of staff and expensive regulatory
conditions to service. It is this cost base
advantage that should ensure that even
when interest rates rise again, P2P and
P2B should continue to offer competitive
rates to both lenders and borrowers
versus traditional banks.
WHY YOU SHOULD READ THIS REPORT
P2B lending is a rapidly growing sector,
offering investors a wide range of
options to achieve higher returns than
are available elsewhere, without taking
on unsuitable levels of risk. The sector
is easily accessible 24hours a day, and
all it takes is a click of a button to invest.
Investors, advisers and intermediaries
operating in this market need to
understand the range of opportunities
available, the different ways to access the
sector and the risks and returns on offer.
Readers of this report will gain at least a
basic knowledge of the sector which will
help them to make educated decisions
regarding their involvement in the sector.
Despite the sector currently accounting
for less than 1% of business lending,
Nesta predicts that P2B has the potential
to supply up to £12.3bn in lending to
businesses annually.
24
This is significant
on a number of fronts. Firstly it increases
the options for borrowers and means
that they could potentially raise finance
faster and cheaper than previously.
This also challenges the dominance of
traditional lenders, the banks, which
will have to improve their services in
order to compete in this new world.
This will also vastly benefit lenders, as it
will give them the opportunity to earn
higher returns than are available through
traditional savings products. And finally,
these benefits should combine to aid the
growth of small UK based companies,
which supply vital jobs, products and
infrastructure which benefit the UK as
a whole.
For financial intermediaries and advisers
it is becoming increasingly important to
understand new areas of finance such
as this, which investors can easily access
and manage themselves. As the reach
of the sector increases, investors will
be able to access the opportunities on
offer independently - there are no real
restrictions on them. It makes sense for
advisers to understand the sector and
be aware of what their clients are doing,
so that P2B can form part of their overall
investment portfolio and strategy. If
their clients do have exposure to P2P or
P2B investments, it could add further
risk and return to their portfolio without
the adviser being aware of or fully
understanding the sector.
Cost base of Banks vs. Lending Club (costs as % of loans outstanding) (2015e)
SOURCE:
McKinsey, Lending Club
FDIC
BRANCH
CS/COLLECTION
OPEX TOTAL BALANCE OUTSTANDING (BPS)
BANKS
COST INEFFICIENTCIES
HIGH MARGINS
RESTRICTIVE LENDING
ORIGINATION
G&A
OTHER
MARKETING
TOTAL OPEX
IT
700
600
500
400
300
200
100
0
200
695
170
100
100
10
30
30
35
FDIC
BRANCH
CS/COLLECTION
BILLING FRAUD
PEER 2 PEER
GOVERNMENT ENDORSED
ATTRACTIVE RATES
CONVENIENT & FLEXIBLE
425bps LOWER
OPERATING EXPENSES
ORIGINATION
G&A
OTHER
MARKETING
TOTAL OPEX
IT
700
600
500
400
300
200
100
0
270
135
39
19
20
28
29
OPEX TOTAL BALANCE OUTSTANDING (BPS)
