Consolidation, public listings or platform collapses – what does the ‘new phase’ of P2P lending involve? Michael Lloyd investigates…
The peer-to-peer lending sector has undergone many changes since the launch of Zopa in 2005.
Against a background of low interest rates, higher demand for credit solutions and ongoing economic uncertainty, the P2P sector is entering a new phase of its evolution – one which will almost certainly involve consolidation.
The pandemic and subsequent economic downturn has already taken a toll on P2P platforms, with concerns ranging from higher defaults, to fewer new investors, to the challenge of working remotely for a prolonged period of time.
As a result, some platforms have opted to wind down, scale back, or pause new lending. And of course, this has led to new rumours around consolidation.
But that is not the only change set to impact the P2P sector in 2021 and beyond.
“We’re about to go into a new phase for P2P lending,” says Daniel Rajkumar, managing director of Rebuildingsociety.
“Since the Financial Conduct Authority (FCA)’s post-implementation review, we have a better, new regulatory standard for P2P.
“And if capital is allocated appropriately with the right risk analysis, and platforms are carefully operating with the phases of the economic cycle, P2P has a really good opportunity to support the economic recovery and could become one of the best performing asset classes of this decade.”
With the coronavirus crisis going on for longer than expected and sector instability as some platforms pause their lending, it is a precarious time for the industry. And loss-making P2P lenders without good portfolio management and controls could very easily end up in difficulty.
“There has been a substantial reduction in the number of platforms and there will continue to be a steady trickle of collapses, but not in great numbers,” says Stuart Law, chief executive of Assetz Capital.
“We can see the market seems to be holding and it looks like the sector has a future.”
Despite this, the P2P lending sector has so far been resilient, with many platforms still generating market-beating returns to investors and some even flourishing while traditional lenders have tightened their criteria.
The consensus is that the better platforms will survive the test of Covid-19, but it will ultimately lead to consolidation and an improved reputation for the sector.
“I think there will absolutely be more consolidation in the marketplace,” says Atuksha Poonwassie, managing director of Simple Crowdfunding.
“P2P is, and will continue to become, more of a recognised finance tool. I think the future of P2P lending is massive and even more so because of a poorer 2020.”
The majority of platforms are optimistic about the future of the sector and believe there will be more partnerships and acquisitions fuelling this consolidation.
This seems to be the case already with Metro Bank acquiring P2P lending platform RateSetter in September, for an initial consideration of £2.5m, with up to £9.5m to be paid out after the completion of the deal.
Meanwhile, Starling Bank chief executive Anne Boden revealed at the LendIt Fintech Europe 2020 virtual conference in October 2020 that the bank will “probably” acquire a lending platform within the next year or two as it seeks to grow its small- and medium-sized enterprise loan originations.
P2P platforms are attractive to banks due to their proprietary technology and lending volumes. This has already resulted in a number of partnerships over recent years.
Starling has a forward flow arrangement with Zopa and a deal with Funding Circle to lend £300m through the coronavirus business interruption loan scheme (CBILS) to small firms through its platform.
“More platforms will be bought by banks,” predicts Neil Faulkner, managing director at P2P analysis firm 4th Way.
“P2P lending platforms will be attractive targets for banks and the entrepreneurs who set them up will all be considering sales to banks as a possible way to cash in.”
Faulkner adds that he does not expect to see formal mergers between equals, but the acquisition of loanbooks from platforms that have chosen to wind down.
“Some will see the opportunity that P2P lending offers and enter the market,” says Simple Crowdfunding’s Poonwassie.
“And once they do, it might make sense to work with an existing platform.”
However, Mike Bristow, chief executive of CrowdProperty, points out that mass consolidation has not happened yet.
“Everyone has talked about consolidation for years, but it has not really transpired,” he says.
“It will happen by weaker players not being able to continue so there will be fewer platforms.”
Covid-19 is certainly weeding out the weaker players in any sector, but the same can perhaps be said for regulation.
Towards the end of last year, the City regulator introduced a raft of new measures including an appropriateness test, a cap on retail investments in P2P and stricter wind-down plans for platforms.
Some industry stakeholders believe that the FCA will introduce even stricter regulations which will make it harder for smaller platforms to survive.
It has been suggested that the FCA will clamp down on P2P investment accounts that have been marketed as ‘easy access’ but prevented lenders from withdrawing their funds during the pandemic.
“P2P regulations are still in their infancy, and the regulator has learnt a great deal over the years as to what works and what does not work,” says Jonathan Segal, partner and head of alternative finance at law firm Fox Williams.
“I think we will see a tightening up of regulations in the short-term.”
Lee Birkett, founder of JustUs, believes there will be a potential increase in capital adequacy requirements for platforms.
“We basically do nine tenths of what a bank does and have a more robust financial model,” says Birkett. “Not much needs changing.”
However, Assetz Capital’s Stuart Law argues that this depth of regulation would not be introduced in the P2P sector as banks adhere to much more detailed, stricter rules.
“Banks are so dangerous that the level of regulation they have is off the scale compared to other firms,” he says.
“They borrow 90 per cent of their capital so need incredibly detailed and controlling regulation to ensure they’re safe enough. P2P was set up to be a simpler structure and is nowhere near as risky.”
Stricter regulations have increased the costs of authorisation and compliance, so industry stakeholders believe there will be fewer new platforms entering the sector.
Furthermore, increased competition in most segments of the lending market mean that existing platforms are having to work hard to grow loan originations and attract new investors. But as long as platforms continue to generate attractive returns, the consensus is that more money will flow into P2P.
Mike Carter, head of P2P platform lending at trade body the 36H Group, points out that the larger platforms such as Assetz Capital, Funding Circle and Zopa are always evolving their business models and attracting more institutional money, showing the strength of the sector.
“It’s an important strategic step in the development of the sector: having proven their ability to originate high quality customers, they can diversify their funding sources and offer a wider range of products while retaining their P2P platform and ethos at the heart of how they do business,” says Carter.
“A good example is Zopa’s recent launch of its credit card, having secured a bank licence. Attracting institutional money to the sector or obtaining a banking licence is a very strong validation of the quality of their P2P business models and will result in stronger businesses going forward.”
Industry onlookers also believe that retail investors will play an important role in the future of P2P, via savvy platforms that understand the importance of diverse funding sources.
“Following the Covid-19 crisis we expect retail P2P to resume its growth path as platforms restore their lending,” says Carter.
Read more: Future trends in P2P property lending
“So, we expect this type of funding to grow over time, but it will become a smaller proportion of total funding by platforms as a consequence of their diversification into institutional funding sources.”
Meanwhile, Stuart Law believes the P2P sector will follow the normal curve that most markets follow, which he describes as initial excitement followed by massive growth, which then slows when reality sets in before good ideas can lead to an expanding sector.
“I think the industry could become 10 times bigger over the next decade,” he says.
“If the sector continues to improve it could become very large in years to come. But if it continually delivers disappointment and failures it would likely struggle to grow and die away. The future is in the hands of each individual company in the sector.
“There has been a substantial reduction in the number of platforms, which will continue to a degree and bigger platforms will continue to move in a direction of institutional capital. I think this will result in a smaller, well-functioning market with quality firms that deliver a good service and return to investors throughout the cycle.”
In the meantime, the P2P sector is at the mercy of the economy, the regulator and the public’s appetite for investment and borrowing.
One year from now, consolidation may have resulted in fewer platforms and a higher quality of products for borrowers and lenders, with more institutional capital and a growing base of retail investors.
Whatever the next phase of P2P lending might bring, platforms are not going to stop innovating, evolving and growing.