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Big Banks Have Nothing to Fear from Financial Upstarts, Study Says

Deloitte sign on top of Toronto headquarters building.Deloitte sign on top of Toronto headquarters building.
Deloitte sign on top of Toronto headquarters building.Roberto Machado Noa—LightRocket via Getty Images

Deloitte has some news for piping hot financial startups—news they might not like to hear.

Despite the hype about their potential to upend lending, the upstarts do not, in fact, imperil the livelihood of incumbent banks, the accounting and consulting firm said in a new report.

Deloitte’s tepid outlook for financial technology upstarts is counter to the disruptive world-conquering storyline that is the norm in Silicon Valley. Big banks are unlikely to be unseated by less regulated, more nimble upstarts, the report said.

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“The rise of Marketplace lending has urged many commentators to highlight the potential disruption that such new business models may bring to traditional banking,” the report said. “Our research presents a different opinion and instead concludes that MPLs”—that is, marketplace lenders—”do not currently have the competitive advantage needed to threaten this traditional banking model.”

The paper doesn’t go into detail about individual companies, although it mentions several in passing like Prosper, OnDeck, and Lending Club among the new crop of lenders, and J.P. Morgan Chase (JPM) and Citigroup (C) in the incumbent camp. (It’s worth noting that Deloitte no doubt has big bank customers.)

Adding support to the report’s conclusions, financial technology firms have hit turbulence in recent months. Prosper, the first peer-to-peer lending company in the U.S., said it would lay off 28% of its workers, Lending Club’s CEO departed under a huge cloud over its lending practices while its share price tumbled, and OnDeck’s stock price took a pummeling because of increasing doubts about its ability to find loan buyers.

Meanwhile, big banks are trying to keep up with innovation by, among other things, experimenting with new technologies like the blockchain, the software underpinning Bitcoin, that could streamline their IT operations. Some banks like JPMorgan Chase and Citigroup have partnered with companies like OnDeck and Lending Club, for example, to provide loans through their platforms.

Lending has traditionally been a cash cow for commercial banks. Yet increased regulatory scrutiny and legacy IT costs are eating into entrenched players’ opportunities.

Startups, on the other hand, are benefitting from low interest rates, low overhead for their technology infrastructure, and low risk associated with their peer-to-peer lending businesses. These factors have allowed them to enter the market as a compelling alternative loan provider for consumers, the report said.

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Deloitte’s report sets out to answer a question: Is marketplace lending a temporary phenomenon? In other words, are the newcomers merely exploiting a set of lucky conditions that will vanish at some point?

In fact, Deloitte predicted that the sector is not going away anytime soon. It foresees, however, that increased regulation and competition “may squeeze returns,” or profits. The startups that stand the best chance of sticking around are niche players that focus on specific market segments, Deloitte said.

For the most part though, these financial tech startups are “unlikely to pose a threat in the mass market,” it concluded. “They may not fully disrupt the model, we do expect them to be a continued presence within the ever evolving banking landscape.”