In recent years, new platforms have emerged in the Swiss lending business, challenging the banks in their core business. The end of the low-interest era could turn the tables.
Traditional banks are being challenged on numerous fronts in the face of digitalization. In recent years, banks have also faced new competition in the market for debt capital. One example is the so-called marketplace lending platforms that are outbidding banks by acting as intermediaries for lending transactions.
Instead of banks, various private individuals or professional and institutional investors offer themselves as lenders on these platforms, including insurance companies, funds, pension funds, banks, or family offices. The sales platforms themselves do not accept deposits and do not grant loans themselves via their own balance sheet; instead, they collect a fee from both sides for their services.
Payment Practices
Lenders enter into a direct contractual relationship with the borrowers. For investors, this means the greatest risk is not the bankruptcy of a platform, but the insolvency of a debtor.
For private lenders, the new platforms open up a source of return previously the domain of banks. The platforms in turn benefit from Switzerland having default rates of less than one percent generally because institutions such as debt collection registers or loss certificates have a positive influence on payment morale.
Taking on the Establishment
In Switzerland, this ecosystem is still relatively small, although developing dynamically, as the «Marketplace Lending Report Switzerland 2022» shows. According to the report, the platforms have been able to secure considerable market shares in some cases or occupy rapidly growing niches in various lending segments.
Between 2017 and 2021, annual growth was 36 percent, resulting in a market volume of 18.5 billion Swiss francs ($20.2 billion) in 2021, almost three and a half times higher than in 2017.
Public Sector Loans
Loans to public sector entities and medium and large enterprises accounted for the largest share in 2021 with 12.0 billion francs. The authors estimate that between 10 and 20 percent of new loan volume in this area is processed via online platforms.
Mortgage intermediaries followed in second place with a volume of just under 6 billion francs, corresponding to 3.5 percent of all new mortgage agreements and renewals.
Crowdlending Works
Loans totaling 607 million francs were concluded via crowdlending. This segment, in which many smaller tranches of investor funds are bundled into larger loan amounts, includes not only professional investors, but often also private individuals who extend fixed-interest consumer, real estate, or SME loans.
Crowdlending platforms use highly automated IT processes and promise lean structures since they do not require a bank as an intermediary. Due to the smaller denomination of the loans, investors can also enter with small contributions and more easily diversify their portfolios.
New Risks Looming
Until now, distribution platforms have operated in an environment of historically low interest rates. How they will fare in a rapidly changing environment remains an open question, the authors say. The recent rise in interest rates is new to many platforms, so it will have a significant impact on loan pricing and risk and return appetite. At the same time, investors' return expectations will adjust.
It is by no means a foregone conclusion the new platforms will continue to be able to take market share away from traditional banks in a different market environment.
