Peer-to-peer lending was created to be just that – peers lending to peers. But 15 years after the first P2P lending platform was launched, the sector has evolved almost beyond recognition.
This week’s news that RateSetter is being acquired by Metro Bank is proof of just how far P2P lending has come in a relatively short space of time. No longer simply fringe players, now P2P lending platforms are acquisition targets, listed companies, and distributors of government-backed loan schemes.
But somewhere along the way, the ‘peer’ factor has faded into the background.
Institutional money has played an increasingly prominent role in the industry in recent years as platforms use large funding lines to scale up.
Then, retail investors were singled out for protection by the Financial Conduct Authority (FCA), and are now required to pass appropriateness tests and complete self-certification questionnaires.
This week, news emerged that one of the sector’s largest providers of P2P consumer loans – RateSetter – was to be acquired by Metro Bank and move towards a balance sheet lending model, rather than traditional P2P. While existing loans will continue to be managed by the platform, once the Metro Bank deal has completed, all unsecured consumer loans will be funded by the bank.
It should be noted that while unsecured consumer loans make up the bulk of RateSetter’s portfolio, the platform also originates residential property development loans and car dealer finance, which retail investors will still be able to fund, according to media reports.
There has been no shortage of speculation around the future of unsecured P2P consumer loans. The coronavirus pandemic will inevitably lead to an economic recession, and any economic downturn will result in business closures, job losses, and ultimately, defaulted loans. And unsecured consumer loans are likely to be the hardest hit.
From day one, RateSetter has been committed to providing loan facilities to retail borrowers, funded by retail investors. Since 2010, the platform has originated more than £4bn in loans, while paying out inflation-beating interest rates to its 84,000+ investors.
Despite this astonishing track record, the platform has been acquired for just £2.5m, with another £9.5m subject to as-yet-unknown conditions.
The valuation comes in stark contrast to the £50m+ raised across RateSetter’s various equity funding rounds over the years.
Other than RateSetter, there is only a clutch of unsecured consumer lenders left in the P2P market. Zopa – the original P2P lending platform – is still offering consumer loans, alongside the upcoming launch of its digital bank.
Self-described “challenger consumer credit business” Lending Works was recently sold to a fund manager which focuses on special situations and distressed investment strategies across Western Europe, although there has been no indication that it plans to stop offering unsecured consumer loans.
And the likes of Unbolted and FundOurselves offer short-term consumer loans under a P2P model.
As economic conditions worsen, some onlookers are predicting a wave of defaults on the horizon across all types of lending. After the government’s furlough scheme ends in October, unemployment levels are expected to rise sharply, leaving many borrowers unable to repay their debts.
Already the P2P sector is starting to report the first signs of rising defaults. P2P property lender Proplend recently apologised to its investors for delays in realising four defaulted loans, and Lending Works has cut its target returns and raised its expected losses.
For asset-backed lenders, at least there is the option of cashing in on collateral. But when it comes to unsecured loans, there is little recourse for platforms once the traditional recoveries routes have been exhausted.
Over the next few months, the P2P consumer loan market will be tested like never before. It remains to be seen whether P2P lending can stay true to its roots, or evolve into something else entirely.