Survival of the fittest! Are more P2P platform failures on the way?
MORE peer-to-peer lending platform closures are being predicted this year due to tightening regulation of the sector.
The industry has already been hit by the high-profile collapses of Collateral and Lendy, but more failures are expected as regulatory changes being introduced by the Financial Conduct Authority approach in December.
Mario Lupori, chief investments officer at RateSetter, thinks consolidation, by way of platform closures, is inevitable.
“Tighter regulation will also help to hasten the exit of sub-standard platforms, ensuring that well run platforms which put the customer at the heart of their model will endure and grow,” he said in a blog post on RateSetter’s website.
“Currently, there is a handful of established, popular P2P platforms that are operating at scale, and then there is a long list of smaller niche platforms. My view is that consolidation of the number of P2P platforms – and across fintech more generally – is inevitable.
“This may involve orderly wind-downs, but also platform failures in the case of particularly weak platforms. While the failure of any business is understandably a blow for its customers, failure is inevitable in the case of poorly run platforms or those that lend to poor quality borrowers.”
He said “natural selection” would root out the weak platforms, which would be better for investors in the long-run.
“In the P2P sector, just like any other industry, businesses that are not up to scratch, being badly run or having weak business models, simply do not continue for long – while those that are well run with solid business models grow,” he said.
“It’s a Darwinian process that will result in a stronger, better P2P sector.”
Neil Faulkner, co-founder of P2P analysis firm 4th Way, agreed that it was inevitable that weaker platforms would be “weeded out”, in part due to more stringent regulations.
“Some of the closures, like Lendy’s, will be a little bit more significant than in the past due to the greater scale these companies have achieved over time,” he added.
“I expect that, when it comes to the top 40 or so platforms, there will be one or two closures a year for the foreseeable future. Several more that no-one has even heard of will also close each year.
“The cause for closure will be a good mix between competition, regulation and the difficulty in setting up a successful platform.”
He also said that a lot of the impact from regulations will be hidden, with many platforms failing to even open.
“Anyone worried about platforms failing should stick to platforms that provide a huge amount of information and data about themselves, their methods and their performance, both publicly and to third-party researchers,” he added.
“The disasters so far have all taken place with opaque platforms.
“Platforms that have been well run and transparent, and then gone on to close down, have done so gently, with investors getting their money back as their loans were gradually repaid by borrowers.”