INSOLVENCIES, credit crises, economic lag and – of course – Brexit. There are many reasons for peer-to-peer investors to worry this year.
Over the past few years, P2P platforms have worked hard to win over investor confidence and the results speak for themselves. Both Funding Circle and Zopa have now passed their £4bn lending milestones, while Innovative Finance ISA (IFISA) investments across the industry were worth £290m in 2017/18 – a 700 per cent year-on-year increase.
But a raft of macroeconomic issues now threatens to spook investors, just as P2P lending is starting to enter the mainstream.
At the time of writing, the terms of the UK’s withdrawal from the EU were still unclear. What we do know is that in the 33-odd months since the referendum, the value of the pound has fallen, the UK economy has slowed, and the stock market has recorded some of its biggest post-crisis losses.
In 2018, unsecured consumer lending fell at its fastest rate in five years, as Brits scaled back their spending amid Brexit uncertainty. And the Insolvency Service recently revealed that personal insolvencies rose by 16.2 per cent last year, while Individual Voluntary Arrangements were at the highest annual level ever recorded. This raises the spectre of higher defaults among borrowers, which would rapidly undermine the hard-won reputation of the P2P sector among retail investors.
According to Neil Faulkner, co-founder and managing director of ratings and analysis firm 4thWay, a ‘worst case scenario’ Brexit could triple the default rate on some P2P platforms, and this in turn may lead to cut-price sales of borrowers’ assets.
However, there is a possible silver lining. If the economy worsens, traditional lenders are likely to take a more conservative ‘wait and see’ approach to their lending businesses. In the 10 years since the global financial crisis, we have seen this in action as banks tighten up their lending requirements and scale back SME funding. At the same time low interest rates have left many savers struggling to match the rate of inflation. This could create an opportunity for alternative lenders to step in and offer funding to UK businesses, while also allowing frustrated savers to make inflation-busting returns.
Furthermore, the P2P sector has been working hard to manage default risks by using extensive credit checks, provision funds, pooled loans and ‘skin in the game’ lending models. If anyone can make the most of a bad macro-economic situation, it’s alternative lenders. Their challenge will be to convince worried investors that they are up to the task.
This article featured in the March edition of Peer2Peer Finance News, now available to read online.