Marketplace lending has emerged as a potential competitor to traditional banks and credit card issuers, particularly as platforms such as Lending Club and Prosper attract borrowers looking for alternatives to revolving credit card debt. With many marketplace loans being used to pay off existing card balances, the growth of alternative lending raises questions about its potential impact on the credit card market.
Despite that growth, credit cards retain important advantages as a flexible source of financing, including convenience and benefits that marketplace lenders may struggle to replicate. The greater long-term competitive threat may instead come from the technology behind marketplace lending, which could reshape how lenders evaluate borrowers, originate loans, and deliver consumer credit.
The growth of marketplace lending platforms like Lending Club and Prosper have inspired numerous industry observers to wonder whether those platforms pose any long-term competitive threat to traditional banks and credit card issuers. A recent Forbes article took a stab at answering that question as it relates to the small business card segment.
“A lot of Peer2Peer and alternative lenders have capitalized on this reputation, providing short-term loans intended to replace credit card debt. Lending Club, the largest global peer2peer lender, counts over 80 % of its loans as credit card payoffs.
Do such inroads spell trouble for the credit card companies and banks? As an investor, should you be concerned about these news types of lenders replacing credit cards as a form of business financing? Unless alternative and P2P lenders significantly lower their rates and provide benefits similar to what credit cards offer, I think plastic is here to stay.”
I agree with the article’s author that credit cards (though not necessarily their plastic incarnations) are safe for the time being. In my recent research report, The Disruptive Potential of Marketplace Lending in the U.S. Consumer Credit Card Market, I argue that the true disruptive potential of these alternative lenders lies in their technology rather than in their expanding marketshare.
Marketplace lending is unlikely to replace credit cards as a major source of consumer and small business financing in the near term. Credit cards offer a combination of accessibility, revolving credit, and additional benefits that alternative lenders would need to match while also providing compelling interest rates.
However, the disruptive potential of marketplace lending should not be underestimated. Its most significant impact may ultimately be technological rather than simply a matter of market share. As alternative lenders introduce new approaches to credit underwriting and loan origination, traditional banks and credit card issuers may need to adapt their own lending strategies to remain competitive.
Overview by Alex Johnson, Sr. Analyst, Credit Advisory Service at Mercator Advisory Group
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