The peer-to-peer consumer lending market is facing fresh new challenges amid the pandemic, but this could be its chance to prove its mettle, as Michael Lloyd reports…
Consumer lending is at the very heart of the peer-to-peer sector, enabling individuals to lend to other individuals. The world’s oldest P2P lender, Zopa, launched in 2005 offering personal loans, funded by regular people. However, the sector is facing unprecedented challenges.
The Covid-19 pandemic has had a devastating impact on the world’s economy and the unavoidable recession is set to hit consumers as well.
The Financial Conduct Authority (FCA) implemented new rules last month requiring personal loan providers to offer a payment freeze for borrowers affected by the pandemic. Notably, P2P lenders are exempt from the new rules, as the City watchdog said that P2P regulated credit agreements are not covered by the guidance.
“Enormous numbers of people are facing at least a 20 per cent drop in their income – and many are facing much more,” states Sarah Coles, personal finance analyst at Hargreaves Lansdown. “There’s every chance that people with previously excellent credit records will default.
“As a result, the FCA has proposed changes to personal loans, which will encourage banks to freeze payments for three months. If people are still struggling to make payments at that point, banks have been told to offer ‘forbearance’ – freezing interest and accepting reduced or paused payments.
“Some P2P lenders are offering help to borrowers, which could have an impact on the stated target returns. “However, as it’s not their money on loan, it’s more difficult for P2P providers to offer ‘forbearance’.
It means there’s a risk that there may be less flexibility, so as borrowers hit difficult times, there could be a sharp rise in defaults which could threaten both returns and the original capital.”
Although they are exempt from the new rules, some P2P consumer lenders have already been offering payment holidays to struggling borrowers.
Meanwhile, Lending Works last month stopped all new retail investor signups, all new loan issuances and all investments from new or existing customers for at least 90 days.
“Due to the current state of uncertainty, it has become extremely difficult to effectively assess customers’ creditworthiness and affordability,” Lending Works said in a note to investors announcing the changes. “This has clearly placed an unsustainable strain on the platform.”
And ‘big three’ lender RateSetter has told Peer2Peer Finance News that it is “materially reducing” new consumer lending amid the pandemic. “We are focussing on delivering liquidity for our investors and this has included materially reducing new lending, while ensuring fair outcomes for our borrowers,” said RateSetter’s head of consumer finance Anna Decoudu.
Even before the pandemic hit, consumer lending was – and still is – a highly competitive market, which is reflected in comparatively low interest rates for investors compared to other segments of lending such as property.
“There are a lot of other consumer lenders that serve that market well, so the competition is more severe already in that channel,” comments John Cronin, analyst at stockbroker Goodbody.
His comments are echoed by Andrew Holgate, chief executive of fintech consultancy Equitivo.
“Why target three per cent unsecured when in property you can be getting seven per cent plus, with the security of a nice asset?” he says.
As a result, there are a relatively small number of P2P consumer lenders, including Zopa, RateSetter, Lending Works and newer entrant Elfin Market, which provides revolving credit akin to a credit card.
Read more: Zopa stops higher risk lending
This is in stark contrast to the P2P property space, where there are dozens of platforms. However, P2P consumer lending has some benefits over other areas of the personal loans market, according to Neil Faulkner, founder of P2P ratings and research firm 4th Way.
“Consumer lending credit-loss rates can be three to five per cent per annum at the more prime end, during reasonable market conditions,” he says. “Payday consumer lending can have loss rates of 10 to 50 per cent per annum.”
RateSetter’s Decoudu argues that it is still an attractive market for the right players. “The UK consumer lending industry is competitive, so delivering at scale and with efficiency is key,” she comments. “With a strong product, excellent customer service, and flawless execution, the consumer lending market is a strong one to be in.”
That aforementioned scale and efficiency is helped by automation. P2P consumer lending tends to be a more automated process than business or property lending, due to the size and volume of the loans.
“Automation is facilitated by a commoditised product, readily available and reliable credit data and the efficiencies of lending at scale,” Decoudu continues. “As a result, customers benefit from consistency, speed and value.”
This helps P2P consumer lenders to compete better on price, adds Mansour Bouaziz, chief executive and co-founder of Elfin Market.
“Most borrower applications from P2P consumer lending platforms receive a fully automated decision, which is less often the case for business or property loans as far as I’m aware,” says Bouaziz.
“There are some benefits to automation, the first one being that it keeps P2P consumer lending platforms leaner and so contributes to making them cheaper than their more traditional high street competitors.”
Despite market challenges, there are real opportunities for P2P consumer lending as the world battles through – and recovers from – such exceptional times. After all, the P2P industry really flourished in the aftermath of the 2008-9 financial crisis, when high street banks reined in their lending.
Perhaps the pandemic could provide P2P lenders – and particularly consumer lenders – with the shot in the arm that they need to gain an even larger share of the market? Mike Carter, head of platform lending at fintech trade body Innovate Finance, recalls that the large P2P players today benefited greatly from 2010 to 2015 when demand for loans outstripped supply following the last recession. He argues that this creates an opportunity for new P2P players in consumer lending to target profitable market segments once economic conditions improve.
RateSetter’s Decoudu agrees. “Despite the current economic uncertainty in these unprecedented times, I am convinced P2P consumer lending has a strong role to play in the finance ecosystem, for both borrowers and investors,” she says.
Legendary investor Warren Buffet famously said, “only when the tide goes out do you discover who’s been swimming naked.” The tide is certainly going out and will lay bare the resilience of all companies, including P2P consumer lenders.
“You’ll see a significant rise in default rates, which will bring out the strong players in the market,” comments Goodbody’s Cronin. “Unfortunately, there will be failures. I think that will make the strong players stronger over time.
“However, I wouldn’t overplay the risk for all firms. It depends how long the economy is shut down for. I don’t think the whole market will fall away – some will survive.”