Now that we’ve piqued your interest…

WHAT do you do when you don’t get the peer-to-peer returns that you were expecting? This is a question that is troubling a lot of retail investors across the UK after a string of P2P platforms revised their target returns downwards.

Many first-time lenders are attracted to P2P investments because of the inflation-beating returns that they claim to offer. With cash ISA and other savings accounts offering paltry annual returns of less than two per cent, cash savers are effectively losing value on their money over time. By contrast, P2P offers returns as high as 20 per cent, in some cases.

Of course, P2P platforms are always careful to remind investors that they should look beyond the headline rates and do their due diligence to ensure that the product they are investing in is a good match for them. But the rates are the headline, after all. And when they go down, people notice.

Lower rates have been a particular trend over the course of this year. Towards the end of February, Funding Circle announced that it was lowering the projected returns on its Balanced portfolio from six to seven per cent to between 5.5 and 6.5 per cent; while its Conservative portfolio was targeting returns of between 4.9 and 5.2 per cent, down from five to 5.5 per cent previously.

Just two months later, the platform lowered its return projections again, blaming a weaker credit environment. Investors in its Balanced portfolio have been told that they can expect returns of between 4.5 per cent and 6.5 per cent per year, while the Conservative portfolio saw its rates lowered to between 4.3 and 4.7 per cent per year.

In March, CrowdProperty announced that it was lowering its rates from approximately eight per cent to approximately seven per cent, in return for more security on its property loans. More recently, MoneyThing announced that it is revamping its accounts and will soon offer investors returns ranging between seven and 10 per cent, instead of the previously offered 12 per cent.

It is worth pointing out that in most cases, P2P platforms are actually increasing their returns over the long term, even after these recent revisions. For instance, in 2017 Funding Circle’s average target returns was between four and five per cent, but this has risen to between five and seven per cent in 2019 to date. Concerned investors should always look towards the longer track record of the platform when checking any changes to their expected returns – it is easy to miss signs of slow and steady progress when your platform is telling you that you are going to earn less interest than you expected.

So why have so many platforms lowered their target returns this year?

There are a few reasons for this. Firstly, as the alternative lending space becomes more competitive, some platforms are lowering their borrower rates in order to attract more small business loans. This naturally leads to lower target returns for the investor.

Secondly, the cost of running a platform has become higher. Several industry insiders have told Peer2Peer Finance News that the cost of entering the P2P market as a new platform is now prohibitively high, and even for established brand names, the cost of hiring and training staff, expanding into new regions, and investing in marketing campaigns can add up quickly. You only need to take a glance at the latest company results to see that most P2P platforms have yet to turn a profit, even after years of managing a successful loan book.

And finally, there is the regulation. On 9 December, the Financial Conduct Authority (FCA) will introduce its most stringent rules yet for the P2P sector, and platforms have been spending hundreds of thousands of pounds to ensure that they meet the high standards set by the regulator. In some cases, this has involved hiring external auditors and compliance specialists, re-tooling their marketing campaigns, and onboarding new back-end processes which make it easier to ‘show their work’ to the FCA, if need be.

In an effort to show that they are taking a pro-active approach to these regulations, and to customer care in general, many platforms have opted to tighten their risk processes over the past year. This means rejecting higher-risk loan applications that would naturally come with higher returns. It also means prioritising secured loans over unsecured loans; and offering additional safety nets for investors such as provision funds and insurance shields.

In short, the UK’s P2P sector is becoming more risk-aware, and this is having a trickle-down effect on their business models – lower risk loans means lower rates for borrowers, which means lower rates for investors. And this is what platforms really mean when they tell investors to look beyond the headline rates. For the cost of one or two percentage points per year, P2P investors are now able to access a higher quality of loan, from a platform which is more closely regulated than ever before. In the wake of the Collateral and Lendy scandals, this seems like a fair trade off.