Apparently traditional banks are moving into higher rate and thus higher risk personal loans. This strategic shift is driven, at least in part, by growing competition from peer to peer (P2P) lending platforms.
The banking industry, while incredibly important in the US, is one of the most regulated industries around. Banks face an ever-growing amount of rules, regulations and requirements, as the non-stop legislative churning machine – also known as Capitol Hill – has continued to saddle banks with greater restrictions. The financial crisis is simply the most recent incentive for politicians to pile on more regulation. According to a report in WSJ.com, banks are looking to boost profit by looking elsewhere – where regulations are not quite as stiff.
In a bid to boost revenue squeezed by new regulations, lenders are turning to high-interest personal loans, a market in which they face stiff competition from upstart rivals.
“Traditional lenders pulled back from the loans during the financial crisis, but they are regaining their appetite as tough new rules on mortgages and credit cards have made it harder for them to profit. The rules largely exclude personal loans, making them more attractive.” states Annamaria Andriotis from WSJ.
Banks have been growing loan originations at a faster pace. The bottom was back in 2010; at $26.7 billion for the first half of the year. This is in contrast to the $62.7 billion in loans during the first half of 2007. Now things are turning around with originations scaling to $34.5 billion through June of 2014.
WSJ quotes a representative from SunTrust Banks saying that demand for consumer lending never went away. The banks did and P2P lenders quickly filled the space.
Prosper is reported to have originated over $167 million in personal loans – just for the month of August. CEO Aaron Vermut is quoted on the comparison between August 2013 and 2014 stating they experienced a growth of 433%. Pretty impressive.
Peer to peer platforms match investors with borrowers and generate risk adjusted returns for just about any type of personal loan. Investors have quickly moved in seeking far higher returns than delivered in a savings account. A diversified portfolio of many different P2P loans helps to mitigate risks. Borrowers, on the other side, are seeking refuge from very high rates typically doled out by credit card companies. The efficiencies of delivering value to both sides of the equation – all on line – should be difficult to miss for traditional banks.
Increasing competition for P2P lenders from traditional banks is really inevitable. But the lean approach and low head count should help keep the more agile P2P lenders ahead of the pack.