UK PEER-TO-PEER lending platforms are poised to shift towards hybrid models to stay afloat, a financial services think tank claimed on Monday.
The P2P industry has re-shaped the country’s small corporate funding and investment market, putting pressure on traditional lenders to step up their game, said the Centre for the Study of Financial Innovation. But it is now facing a plateau that may require it to expand into direct lending and balance-sheet operations, as well as cutting interest rates, to become profitable.
“Major challenges for the ‘first wave of P2P’ platforms remain,” said Andy Davis, the author of the report. “As pure intermediaries with no lending capital to deploy, they rely on achieving very large loan volumes to move into profit.
“In a highly competitive environment awash with cheap bank deposits, this is going to increase the pressure on them to reduce their cost of funds – thereby cutting the returns available to their lenders.”
He pointed out that SME lending growth has become relatively stagnant and that less than half of UK small businesses are aware of new online sources of finance. This casts a shadow over the volume growth that P2P lenders need to achieve to become a mass market.
And in response to the digital innovation brought about by P2P players, traditional banks have begun to change the way they address the SME market, upgrading their online services and shortening their decision-making timeframes.
Attracting borrowers and scaling up investment volumes is going to be one of the key challenges for platforms going forward, the report said, alongside proving the soundness of their underwriting during a credit downturn and investing in continued innovation in customer service.
“In response to these pressures, hybrid models will develop,” said Davis. “Established direct lenders will increasingly use P2P platforms to syndicate their loan books into the retail market.
“P2P firms may, in addition, start to deploy their own balance sheets, like a bank, which will increase their profitability, or run collective investment schemes, like an asset manager.”
Davis’ comments are part of a new report on alternative SME finance published by the financial think tank. The paper, called “From Peer2Here”, highlights the achievements of the P2P lending sector to date, which include financing £4.5bn of term loans to UK SMEs and “having sparked a revolution in customer expectations that is driving change across the entire market”.