PEER-TO-PEER has come a long way from its early days of a few technology firms simply set up to let the public bypass the poor rates and services on offer by the banks and lend to each other.
The ethos is still much the same, but now investors and borrowers are given access to a fully regulated space that is not only in competition with major banks and institutions but in many cases gets funded by them.
Here are five of the biggest game changes in P2P.
P2P firms have never shied away from regulation and some of the bigger players such as Zopa and Funding Circle established the industry’s own self-regulatory body the Peer-to-Peer Finance Association in 2011.
This created standards on transparency, but the sector has become a lot more professional since the Financial Conduct Authority took over regulation of the consumer credit sector in 2014 and as a result decided all P2P platforms needed full regulatory permissions.
This meant between 2014 and 2016 established platforms had to apply to move from interim permissions to full authorisation while new entrants would have to go through a full application.
Many of the smaller and newer firms such as Crowdstacker and LandlordInvest achieved regulation first while bigger brands such as Zopa, Funding Circle and RateSetter, only achieved authorisation at the start of last year.
Regardless of the timings, all P2P platforms should now be regulated. This means these firms must follow rules on protecting client money and hold minimum levels of capital to help protect themselves from failure.
Unlike financial products such as a traditional savings account, there is no Financial Services Compensation Scheme (FSCS) protection, but investors are often getting a higher rate in return.
Ultimately, regulation has made the sector more professional and provides reassurance for investors and borrowers as they can check the platform on the FCA register to allay any concerns
Innovative Finance ISA
Regulation was just one step for the sector in moving from a niche to a respected financial product.
In 2016, P2P also joined the ISA family with the launch of the Innovative Finance ISA (IFISA).
This gives the sector another element of respectability as P2P savings can be put in the same tax wrapper as other ISA products. ISA managers also have to be approved by HMRC, giving another layer of regulation.
Investors can use part of their annual ISA allowance to fund their IFISA each tax year and can hold it alongside a cash and stocks and shares wrapper. Currently they can only hold one live IFISA with a single provider at a time, but there is nothing to stop them transferring existing ISA money to an old IFISA on a different P2P platform – if transfers are allowed – as this wouldn’t count as a new subscription.
Technology businesses used to have a reputation for being run by spotty teenagers from their bedrooms.
But P2P firms are increasingly becoming bigger brands. Zopa is in the process of applying for a banking licence to allow it to offer credit cards and savings products.
This will provide an example for other P2P lenders on how much growth potential there is for fintech firms.
P2P lending emerged as a way of bypassing the poor rates on offer by the banks for investors and giving borrowers access to funds faster.
But institutions such as the banks themselves as well as funds and investment trusts have been keen not to miss out.
According to the Cambridge Centre for Alternative Finance, 45 per cent of P2P consumer lending and 29 per cent of P2P business lending was funded by institutions such as pension funds, mutual funds, asset management firms and banks in 2016.
Institutional investors include the British Business Bank, which has backed Funding Circle loans, BNI Europa, which has supported MarketInvoice and investment trust P2P Global Investments which has been involved in landmark securitisations of loans on Zopa and Funding Circle.
Interest from institutions suggest there is a lot of respect out there for the P2P asset class.
We have had regulation, ISA-status and the transformation from P2P to pure banking. The question is where next? For some of the bigger players such as Zopa, Funding Circle and RateSetter, the rumour is an initial public offering could be the next stage.
Funding Circle is rumoured to be working with investment banks on a listing while Zopa and RateSetter have also expressed an interest in going public, giving each of them a multi-million pound price tag.
Ultimately this would bring P2P full circle, from an alternative option that started by putting people together without the intermediary, to one that grew with institutional interest, and now the public will be able to get involved directly again through the stock market.
There are risks with P2P, as with any investment, but it is clear that there is plenty of growth and game left in this space.