French P2P Lending Market - Progressive or Restrictive
In part two of the European lending market series, we review the lending environment of the 3rd largest economy in Europe, France. The French legislative reforms have been particularly progressive toward peer-to-peer lending, with specific acts relating to crowdfunding. However, as we examine, they are fairly restrictive with significant barriers to entry, particularly for consumer lending.
French peer-to-peer lending volumes have grown steadily since 2016, with property lending being the fastest area of growth in 2017-2018 (57.3%). The total market is roughly half the size of the German peer-to-peer market (€1bn) and pales in comparison compared to the UK market (£6.4bn).
The overall French lending market, which includes a very small proportion of P2P lending, has grown since 2016. New originations of business and consumer loans in France grew 9.9% and 6.8% (annualised) respectively in 2018.
The ECB dropped the base rate to 0.0% in March 2016 which triggered French homeowners to renegotiate their mortgage to more favourable terms. Following this period of renegotiation new lending has dropped significantly, normalising in 2018.
France were early adopters of crowdfunding regulation, with a specific legal framework in place since October 2014. The regulation specific to crowdfunding does not provide any EU passport possibilities so French platforms wishing to operate elsewhere in the EU must either apply locally, or passport through permissions which are ‘passportable’ (see below).
The legislation created two distinct types of participants:
- Conseillers en investissements participatifs (CIP) - crowdfunding advisors
CIP’s can offer shares, or bonds (typically issued as “minibonds”) of up to €8m per issuer per year. The minibonds must have a maximum repayment date of five years with instalments at least once per quarter. An important factor that reduces friction for the borrower is that no prospectus is required, just key facts.
- Intermédiaires en financement participatif (IFP) - crowdfunding intermediaries
IFP’s can offer straight loans (typically how business P2P loans are conducted), donations, or rewards.
A big sticking point in the consumer P2P loan space is that only financial professional individuals can borrow. On the lender side, a single individual may not lend more than €2,000 per project.
Authorised Credit Institutions
With the legislation being so prohibitive to consumer lending, the only reasonable way a P2P firm can lend to consumers is by setting up as an authorised credit institution. This is a costly and regulatory cumbersome process, but it does come with the benefit of being able to “passport” into other EU countries.
French P2P Lenders
A number of online lending platforms offer opportunities to both institutional and retail investors.
France P2P Platforms with over €10m in Origination (2018)
CIP and IFP operators must describe loans as projects and are offered to investors on an individual basis (self-select). Younited Credit (a credit institution), offer investment in loans in the form of an alternative investment fund.
Historical returns tend to be stronger for property lenders who have seen between 9-10.3%. Younited Credit fund returns were 2.11% in 2018, in line with previous years back to 2015. The largest business lender October are advertising returns of 3.9%.
The majority of lending in France is conducted by an oligopoly of upto 8 big banks and hundreds of significantly smaller credit institutions.
Bank consolidation is apparent in the numbers, as seen by the substantial reduction in credit institutions in the graph below.
No Pain, No Gain
The main threat to Frances €2.3tn economy is their relatively high unemployment rate of 8.6%, in comparison to their British (3.8%) and German (3.1%) neighbours. This has steadily decreased from 10.0% at the start of 2017 as a result of the French president Emmanuel Macron’s reforms, of which unemployment is at the centre of policy. Macron immediately implemented a series of reforms to reduce labour market rigidities and incentivise low-wage work with tax reductions. Macron targets 7% unemployment by 2022.
GDP has grown by 1.2% (UK 1.0%) and house prices are up 3.2% (UK 0.9%) in the past year.
Lending in France is typically done by traditional banks with P2P platforms yet to have a major impact. There are opportunities for investors, particularly in the property segment of the French peer-to-peer lending, with returns up to ~10%.
While progressive of France to have specific crowdfunding regulation in place, the laws themselves are fairly restrictive which has potentially resulted in a relatively small market. The barriers to entry for consumer platforms are high for both the borrower and lender and the lack of automated investment in business loans is less desirable for all investors.