The UK's historically low interest rate could benefit alternative lenders

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In an attempt to head off an economic downturn following Brexit, the Bank of England lowered interest rates on Thursday from 0.5% to 0.25% — the lowest ever in the UK.

This could be a windfall for the UK alt lending market, as alt lenders claim that the economic downturn of 2008-2009 drove the growth of the industry. The fact that UK P2P lender Zopa's loan volumes increased 162% year-over-year (YoY) in 2009, compared to 36% in 2008 seems to support this argument. Here's how these lenders might benefit from the rate cut:  

• Increased demand. If banks don't increase lending in response to the interest rate cut, and instead tighten lending conditions to hold onto capital as they did in 2008, demand for loans would grow. This demand could be met by alt lenders, which are unlikely to tighten their own lending criteria because they have much lower capital requirements. 
• Increased supply. Historically, a lower interest rate means banks lower the savings rate they offer on deposits. And the UK is already trending in this direction. As a result, savers may start to look for other investment options. Alt lenders typically offer interest rates at least 1.5 percentage points higher than savings accounts, which could prove attractive to consumers. This would increase the supply of capital for alt lenders and enable them to meet increased demand. The Innovative Finance Individual Savings Account (IFISA) may also drive increased supply of capital, as it allows consumers to invest in alternative lenders and receive tax-free returns.

Some alternative lenders are confident that the interest rate cut is positive for them. Stuart Law, CEO of P2P lender Assetz Capital, said that he expects investors to continue to turn to the alt finance market in order to improve returns on capital. And James Sherwin-Smith, CEO of Growth Street, an alternative overdraft platform for small businesses, said that companies were likely to turn to alt lenders as a way to "borrow on better terms." 

We’ve entered the most profound era of change for financial services companies since the 1970s brought us index mutual funds, discount brokers and ATMs.

No firm is immune from the coming disruption and every company must have a strategy to harness the powerful advantages of the new fintech revolution.

The battle already underway will create surprising winners and stunned losers among some of the most powerful names in the financial world: The most contentious conflicts (and partnerships) will be between startups that are completely reengineering decades-old practices, traditional power players who are furiously trying to adapt with their own innovations, and total disruption of established technology & processes:

• Traditional Retail Banks vs. Online-Only Banks: Traditional retail banks provide a valuable service, but online-only banks can offer many of the same services with higher rates and lower fees

• Traditional Lenders vs. Peer-to-Peer Marketplaces: P2P lending marketplaces are growing much faster than traditional lenders—only time will tell if the banks strategy of creating their own small loan networks will be successful

• Traditional Asset Managers vs. Robo-Advisors: Robo-advisors like Betterment offer lower fees, lower minimums and solid returns to investors, but the much larger traditional asset managers are creating their own robo-products while providing the kind of handholding that high net worth clients are willing to pay handsomely for.

As you can see, this very fluid environment is creating winners and losers before your eyes…and it’s also creating the potential for new cost savings or growth opportunities for both you and your company.

After months of researching and reporting this important trend, Evan Bakker, research analyst for BI Intelligence, Business Insider's premium research service, has put together an essential report on the fintech ecosystem that explains the new landscape, identifies the ripest areas for disruption, and highlights the some of the most exciting new companies. These new players have the potential to become the next Visa, Paypal or Charles Schwab because they have the potential to transform important areas of the financial services industry like:

• Retail banking

• Lending and Financing

• Payments and Transfers
• 
Wealth and Asset Management

• Markets and Exchanges

• Insurance

• Blockchain Transactions


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