Peer-to-peer lending is expected to enjoy exponential growth as healthy margins attract new players to fill niches left untouched by the big banks.
A new report from Morgan Stanley has forecast 900 per cent growth in the US in the next five years, from 1 per cent of unsecured consumer and SME volumes to 10 per cent.
The report said that peer-to-peer lenders would also establish a meaningful presence in Australia by 2020.
One reason is that the major banks have largely ignored consumer unsecured lending in favour of more lucrative mortgage lending, according to the report.
Another reason is the growing margins and high returns in unsecured consumer lending.
“The spreads between rates on personal loans and credit cards versus cash rates in Australia are very wide, and have actually expanded over the past 20 years, in contrast to trends in the mortgage market,” the report said.
“Furthermore, we believe that margins in consumer unsecured lending have expanded more since the financial crisis than in any other major product segment.”
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.
Peer-to-peer lending is also an attractive play for investors who want an alternative asset class, according to the report.
“Australian interest rates are at record-low levels, but consumer unsecured borrowers are still paying rates of more than 14 per cent,” it said.
“This provides significant scope for peer-to-peer lenders to offer rates that meaningfully lower borrowers’ interest payments, while still offering attractive returns to investors.”
However, the Morgan Stanley report said peer-to-peer lenders might have to deal with increased ASIC scrutiny, which could limit the growth prospects for retail funding.
Another potential challenge are the big four banks, which have the financial strength to replicate the technology and pricing of peer-to-peer lenders if they want to.
The report also noted that peer-to-peer lenders could be impeded by the cost of customer acquisition.
“We expect that the peer-to-peer lenders will look to raise awareness and acquire customers through partnerships. However, the size of the smaller financial services providers – for example small banks, credit unions, building societies – limits the scope for acquisition,” it said.
“At the same time, the banks have already established relationships for the provision of financial services with some of Australia’s leading consumer-facing companies like Qantas, Woolworths and Coles.”