Can banks be displaced by peer-to-peer and market place lenders?
According to a recent paper mentioned in an article on the website of business school INSEAD which advised the central bank of France on financial stability, it is not sure that new players have the expertise and infrastructure to replace banks.
Lending is more than just matching investors and borrowers. All the services of consequent control of risk, trading claims when investors need liquidity and restructuring loans are needed. Credit risk can be a problem. The low interest rate environment and minimal regulatory oversight of non-banking lenders will not be here forever.
3 major functions of banks
- Data processing: Banks don’t have a competitive advantage here. Fintechs (PayPal or TransferWise) are very active in this area.
- Data analysis: Advisory work regarding risk management and asset management requires costly financial expertise.
- Banks provide liquidity to economy (they transform short-term deposits into long-term loans thanks to their unique balance sheet structure).
The entry of fintechs in the last two categories of banking services will not be easy.
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