What: A recent report in the Sydney Morning Herald titled 'Banks look vulnerable as lucrative loans market gets personal online' should act as a reminder to investors in the banking sector that their world-leading levels of profitability will continue to attract competitors vying for a slice of business from their lucrative customers.
So what: The newspaper report focussed on the disruptive technology of peer-to-peer lending and what it described as "a growing number of people pocketing a piece of the major banks' healthy profits, by lending their savings directly to borrowers and charging interest."
There are already a number of established companies offering alternative loans to consumers including Cash Converters International Ltd (ASX: CCV), Money3 Corporation Limited (ASX: MNY) and Thorn Group Ltd (ASX: TGA).
It's likely that in many ways these alternate loan providers are complementary to each other as the increasing availability and popularity of non-bank lenders, including peer-to-peer lending, increases the overall comfort the general public will have with this sector.
While the threat to bank profits may not appear imminent, in the medium term this could significantly damage a bank's franchise should consumers on mass view the non-bank lending sector as a viable alternative.
It's surely got banking executives in a quandary with Westpac Banking Corp (ASX: WBC) even taking a stake in one of Australia's most successful peer-to-peer lenders.
Now what: When it comes to investing, nuances matter. Will peer-to-peer lending obliterate the profits of the major banks? Not likely. Will smaller nimble financial services firms like the three mentioned above become dominant in the personal loan market? Not likely either.
That's not the concern for investors in bank stocks. Rather, it's the potential for a structural change which has a lasting effect on margins and profitability. In this regard, agile competitors and new disruptive technologies certainly pose a threat to the long established reign of the major Australian banks.
