Banks and Consolidation Loans: What Does the Future Hold?
The consolidation loans consumers typically use to pay off high-interest debt have always been the domain of banks and building societies. This is because such loans are usually secured loans taken against the equity in the borrower's property. Our traditional lenders are already familiar with this form of financing due to their experience in making mortgages, so it's natural that they would dominate the market for consolidation loans. But how long will their dominance last? What does the future hold for banks and consolidation loans?
These questions are motivated by a fascinating article posted by PYMNTS.com in late December 2016. The article addressed the topic of businesses beginning to move away from banks in relation to receiving electronic payments. In summary, here's the deal: the introduction of electronic payment systems has gradually reduced the role of the bank to nothing more than institutions capable of housing cash so that transactions can be completed between merchants and payment processors.
In the early days of electronic payment processing, payment processors were the ones left on the outside looking in. They processed payments on behalf of banks and merchants, earning a percentage of each transaction as their income. But today's businesses are now more willing to interact directly with their payment processors and leave their banks on the outside. It's all due to the Software as a Service (SaaS) concept now driving electronic payments.
A Similar Mindset for Loans
By now, you might be wondering what electronic payments and consolidation loans have in common. In the context of what we're discussing in this post, the one thing they have in common is that they no longer have to rely on banks as essential partners. Just like merchants can work more closely with their payment processors and less with their banks, consumers can arrange consolidation loans through brokers and peer-to-peer lenders without any need for direct contact with banks.
The result is that banks are left on the outside looking in. Consolidation loans arranged by brokers still use cash stored in banks, but the bank may not necessarily own that money. It might be money belonging to a third-party lender that doesn't qualify as a traditional bank or building society. Of course, there is the peer-to-peer arrangement to think of as well.
Peer-To-Peer May Replace Banks Altogether
Peer-to-peer lending is something that has been growing exponentially over the last few years. In a peer-to-peer scenario, groups of investors pool their money for the purposes of loaning it out through electronic platforms that operate similarly to the traditional mortgage broker. This kind of lending leaves banks entirely out of the equation.
The interesting thing to note is that peer-to-peer lenders are gradually more willing to offer retail level consolidation loans. The more money they successfully loan to individual consumers, the more they will be willing to compete in what is undoubtedly a highly competitive market. It is conceivable that peer-to-peer lenders may someday replace banks entirely â?? at least in the arena consolidation loans.
From the borrower's perspective, all of this should be very good news. Whether banks continue to dominate the market or lose ground to non-institutional lenders and peer-to-peer platforms, it will not change the fact that the number of options for consumers will keep growing. They have to. Competition breeds more products which, in turn, creates lower interest rates and better terms.
Watching all this unfold will be interesting. In the meantime, there are plenty of consolidation loans out there if you need to get your own debt under control.
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