Peer-To-Peer Online Lending Exchanges Emerging in US and UK

A turbulent global economy, an increase in individual debt, a low return on savings, and increasing asset prices are changing consumers’ borrowing behavior. New research from TowerGroup finds that peer-to-peer online lending exchanges — direct lending by investors to individual borrowers — are emerging in the US and UK as an alternative platform to traditional savings and investment options, a trend that will have an impact on unsuspecting financial services institutions.

“Given the instability we’re experiencing in the global economy and an increase in bad debt, many banks are reacting by adopting more sophisticated risk management frameworks,” said Ted Iacobuzio, managing director of the European Banking & Payments research practice at TowerGroup. “By being more selective about to whom they lend and not offering the most competitive rates, banks are making it more expensive for consumers to borrow. TowerGroup finds that a growing number of consumers have responded by exploring alternative investment means in order to get better returns on their money — a potentially disintermediating force over the long term for traditional lending institutions.”

Highlights of the research include:

• The development of an integrated world capital market means that interest rates and inflation are now a function of not only in-country factors, but also savings and investment decisions abroad.

• Investors are often finding it difficult to get a good return at reasonable risk. TowerGroup finds that individual investors are beginning to explore alternative investment platforms found on the Internet, such as those from consumer online lending exchanges like Prosper in the US and Zopa in the UK. The Internet is encouraging more fluid mobility of funds for savvy consumers in search of the best interest rates.

• By targeting creditworthy individuals, alternative investment platforms — such as the peer-to-peer online lending exchanges — will likely steer valuable customers away from traditional banks over time.

• TowerGroup believes that alternative investment platforms like online lending exchanges could outlast the interest rate factor (low for investors, high for borrowers) and become significant players in the future financial services industry for individuals and businesses.

Iacobuzio continued, “TowerGroup believes that what investors find most appealing about peer-to-peer online lending exchanges are their relative simplicity and accessibility. While widespread take-up of these services isn’t anticipated in the short term, the consumer segment attracted to them is also one of the most profitable for banks. Banks need to consider how they might compete with these new exchanges, or they may find themselves lighter on good customers and heavier with bad debt.”