US P2P vs UK P2P: A Tale of Two Countries
PEER-TO-PEER lending is rapidly growing in popularity in both the US and the UK. However, there are some significant differences between the two countries, which may affect the way investors act towards them in the year ahead.
For a start, the US market is worth much more than the UK market. Lending Club, the world’s largest P2P lender, originated $1.97bn in loans in the third quarter of this year alone. By comparison, the UK’s P2P platforms were lending an average of £197m per month in the first three quarters of 2016.
However, high loan volume does not necessarily mean that the US market is more secure. In fact, some analysts have pointed out that the US is now seeing higher default rates thanks to its exposure to high-risk loans and the popularity of securitisations.
“We talk to a lot of American investors and American-linked investors tend to look at the American markets where interest rates are much higher, but then so are the default rates,” Stuart Law, chief executive of Assetz Capital told Peer-to-Peer Finance News. “I think investment trusts that operate in the US have been attracted by the higher coupons but have perhaps seen higher default rates as well.
“When these investment trusts were set up they were primarily looking at the US and the UK P2P market was quite new.
“But the UK market has got bigger, and the UK has fewer defaults.”
It seems investors are taking note. At the end of November, P2PGI told Peer-to-Peer Finance News that it would be shifting its focus away from US loans and towards UK loans in 2017, while Victory Park Capital wound down its peer-to-peer portfolio due – in part – to losses from securitised loans through US platform Avant.
Furthermore, high profile scandals such as Prosper’s association with the San Bernardino shootings and Lending Club’s fraud investigation have shaken the trust of retail investors, resulting in a slowdown in growth. Although Lending Club’s $1.97bn third quarter may look impressive in isolation, it actually represented a 12 per cent drop in loan volumes year-on-on year. Meanwhile, the UK’s P2P platforms saw record growth towards the end of the year, as retail investors sought out higher interest rates and institutions took advantage of the low pound.
The UK market is always going to trail the US due to its comparative scale, but UK P2P lenders can learn from the mistakes and successes of their US counterparts. Tighter regulation has been promised by the FCA, and the few securitisation deals to take place thus far have been rated highly by credit agencies.
By avoiding scandals and focusing on strong loan books, the UK may be able to rival the US in terms of quality, if not quantity.