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Are the big four banks’ profits under threat from peer-to-peer lending?

commonwealth bank CBA

Should the big four banks be looking over their shoulders as a new wave of competition is growing in Australia?

In the past, non-bank mortgage brokers challenged the status quo of the big banks and took some market share in residential mortgages. That created more competition and kept interest rates lower to the benefit of home loan borrowers.

Still, today the big four together control almost 80% – 90% of the total home loan market. The challengers made a dent, but crisis averted, it seems.

Now, a new trend called peer-to-peer (P2P) lending is setting the stage for the next challenge against the big four banks’ lucrative personal lending market.

This service matches up private lenders and investors who want to lend money for a certain return with individual or small business borrowers looking for a low rate and easy access to funds.

P2P lending has grown big in the US and UK over the past decade. Some are turning their sights toward Australia, but there are domestic P2P lenders as well like Sydney- based SocietyOne, which has media big-names James Packer, Lachlan Murdoch and Ryan Stokes as equity holders, and LendingHub.

A new P2P lending company called MoneyPlace is about to join the fray. This start-up is headed by four experienced banking industry people who all once worked for National Australia Bank Ltd (ASX: NAB). This service will mostly be for consumer loans of $5,000 – $30,000.

Will P2P lending develop like non-bank home loan mortgage brokers did? One of the four MoneyPlace founders, Stuart Stoyan, estimates the P2P lending industry in general could be worth as much as $50 billion within 10 years. That would be about 15% – 20% of the consumer and SME (small-medium enterprise) market.

It may be possible these domestic and overseas P2P lenders can drive a wedge into the existing market and gain market share, but the big four may have their own plans. Westpac Banking Corp (ASX: WBC) itself invested in SocietyOne through one of its venture capital funds in early 2014. That may be to keep abreast of innovative finance products, as well as to benefit from any business success in the new industry.

The P2P lenders aren’t listed on the ASX, so interested investors still can’t invest in them. As for the big four banks, their earnings in this field of finance could be affected. That said, banks like Australia and New Zealand Banking Group (ASX: ANZ) and Commonwealth Bank of Australia (ASX: CBA) will still control the lion’s share of this business with their peers.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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