UK PEER-TO-PEER platforms that originate consumer loans will increasingly turn to securitisation in order to grow their businesses, according to a new report from Moody’s.
The ratings agency said on Wednesday that it expects to see a number of deals take place over the next two years.
“Most fintech consumer lenders may tap financial markets for their growth trajectory, liquidity, and for a more stable funding,” said Greg O’Reilly, assistant vice president and analyst at Moody’s.
“Securitisation will provide access to new investor bases, widening their access to institutional capital.”
Securitisation involves packaging up loans into tranches and selling them off to institutional investors. It developed a bad reputation due to its mis-use in the lead-up to the 2008 financial crisis, but the practice has grown in popularity again in recent years.
Funding Circle became the first UK P2P platform to securitise its business loans earlier this year and P2P Global Investments funded the securitisation of Zopa’s loans that was announced last month – the first securitisation of unsecured consumer loans in Europe.
The UK consumer lending market is worth £121bn and P2P platforms have just a three per cent share of it, according to Moody’s.
However, their influence on the sector is growing, with annual volumes for P2P consumer loans skyrocketing by 85 per cent from 2014 to 2015.
Banks still dominate the sector but are now having to compete against fintech disruptors.
“Technology is the new frontier in the fight for consumer loan business, but banks will remain competitive, limiting the impact on their business,” said Carlos Suarez Duarte, a vice president and senior analyst at Moody’s.
“Banks have responded to the challenge by revving up their own digital strategies.”
The US P2P market is more mature and has seen over 50 securitisations, around 30 of which were in the consumer segment, equating to issuances totalling $4.6bn (£3.6bn) since September 2013. However, the Lending Club corporate governance scandal has tarnished the industry’s image and dented institutional investor sentiment across the pond.
P2P lenders in the UK have targeted more credit-worthy borrowers to date, which is reflected in low default rates, according to the ratings agency.