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Peer2Peer Finance News | August 18, 2019

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P2P sector ready to take on institutional money challenge

P2P sector ready to take on institutional money challenge
Anna Brunetti

THE PEER-TO-PEER sector is well equipped to head off the potential risks posed by the growing involvement of institutional money, which it needs in order to thrive, two industry executives have said.

Various sources recently voiced concerns that institutional investors could start to drive platforms’ decisions away from the interests of retail clients, for example by directing them towards specific asset classes, return rates or underwriting criteria.

“There is a danger that some businesses in the sector are dependent on the next deal [with a larger investor] in order to keep the lights on,” admitted Angus Dent, chief executive of ArchOver.

When an institutional investor allocates larger amounts of money, the platform may come under pressure to put those funds to work quickly.

“That could lead to dubious credit and underwriting decisions,” said Dent, “which is something the sector must resist strongly. And I expect that most people are already doing so.

“They are widely aware that such move has the potential to destroy their business in the long term, and damage it in the short term.”

The sector has already proved it is capable of reaping the benefits of increasing institutional investment without loosening its standards, he said, with many of the “cowboys” shutting down after the announcement of the P2P sector review by the Financial Conduct Authority.

And institutional money is key to platforms’ ability to make an impact in the real economy, added Stephen Grice, director at Ludgate Finance.

“We need institutional funds; retail capital alone would fail to make the P2P sector a challenger to banks in channelling funds to the economy,” said Grice.

He agreed with some critics that the demands of institutional funders are directing credit appetite at some platforms, “which is set to become a clearer trend over the coming months,” said Grice.

Ivor Freedman, chief executive and co-founder of P2P specialist F&P, has voiced concerns that platforms are currently shifting away from property lending to prioritise institutions’ preference for other borrower segments.

But Grice said this could actually have positive implications for the sector, which has the opportunity to fill a widening gap in SME funding.

“This is actually a positive development within the industry, and moves us away from dependency on a property bubble to something more akin to the old-fashioned principles of business lending”, said Grice.

“There is already something of a polarisation of platforms within the industry, with retail-heavy platforms more likely to be property focused. In contrast, institutions can pick up property exposure elsewhere, so they are more likely to want to underwrite good-quality business loans.”

In channelling larger funds to the real economy, platforms need to bolster their business development and credit teams to ensure they are up to the challenge, he said.

A box-ticking automated process is not enough to understand borrowers completely, he added.

“To guarantee that the quality of the service [doesn’t deteriorate in the process], a P2P firm needs a lot of boots on the ground,” said Grice.

“It is very much about judgemental lending, as opposed to automated lending.”

Read more: UK SMEs face funding black hole after 2020