Germany: Peer-to-Peer Pressure on Traditional Lenders
This article was written by Rupert Elder and edited by Iain Niblock.
As we expand our reach across European jurisdictions, we are reviewing the current alternative lending markets in various European countries. Germany has the largest population and GDP in Europe, but it’s not regarded as an alternative lending hotspot. This blog is set to provide context to the lending markets in Germany as well as demonstrate the opportunities available to investors in this market.
As seen in the chart below, peer-to-peer lending in Germany has seen volumes almost double each year since 2016 to just over €1bn. Although €1bn is a considerable volume, origination is low compared to the UK, the largest market in Europe, where 2018 volumes reached £6.4bn (Alt-fi).
As shown in the chart below, total loans in Germany (excluding credit cards, overdrafts, and revolving loans) in 2018 were €1,236bn. The €1bn of P2P lending therefore equates to roughly 0.08% of the total lending market.
The relatively low lending volumes and penetration into the lending market can in part be pinpointed on the regulatory environment in Germany. Only banks and specialist closed ended alternative investment funds are permitted to issue loans in Germany, resulting in peer-to-peer lenders having to engage in convoluted legal and financial partnerships with the traditional banks. Although the regulator has not provided a framework for the industry to foster, the rise of so-called “challenger banks” such as Bunq, N26, ComDirect, 1822Direkt, and DKB may give an avenue to more efficient partnerships with P2P platforms and lead to greater fintech innovation. A lender referral partnership has been developed by Auxmoney and N26, as an early example.
German P2P Lenders
There are opportunities for investors to access risk adjusted returns offered by alternative lending platforms.
Germany P2P Platforms with over €10m in Origination (2018)
Similar to the UK market there are a number of different investment options for investors, some lending platforms, such as CreditShelf or Exporo, offer the ability to select individual loans, while others such as Funding Circle and Auxmoney offer auto-bidding functionality. Both retail and institutional investors are active on the marketplaces.
It should be strongly noted that advertised indicative returns from the platforms may not necessarily translate to reality. The returns provided by the P2P platforms in Germany are generally gross, therefore do not account for defaults or cash positions. On a net IRR basis, the returns are likely to be significantly less.
Investors should be cautious when considering property lending which accounts for 27% of the peer to peer sector in Germany. Across the majority of the large property lenders, Exporo, Zinsland and E&V Capital lending is on a subordinated basis. In the event of default, the primary lender, generally the bank, will be paid first followed by the investors on the platform. This leads to lower recovery rates.
The P2P consumer lender, Auxmoney is significantly larger than any other P2P lending platform in Germany and accounts for approximately 0.5% of the entire consumer lending market. With their large database of customers (over 100,000 loans made) and years (founded 2007) of developing credit models, it will be of interest to see how they perform in the SME space, which they joined in April 2019.
Invoice Finance provider Billie which was launched by the founders of Zencap (Acquired by Funding Circle in 2016) also offers opportunities to investors.
Leaving a Mark on Deutsche Banking
If P2P platforms, or other direct lenders are not doing the lending, it’s worth taking a look at the wider market to investigate if this market is likely to grow. The German banking system, in part government owned, is being drastically consolidated. In particular, the regionalised savings banks and co-operatives of old who typically lend to consumers and small businesses are being acquired, merged, or replaced.
But the net amount of lending in Germany remains positive – there is clear demand for loans, and indeed the ability to take on new loans. Both household and private sector debt-to-GDP are among the lowest in Europe at 54% and 148% respectively (compared with 87% and 224% of the UK), implying that culturally Germany is not a nation of borrowers.
The P2P platforms position themselves as a much more convenient alternative. An online only process gives offers or rejections within hours, compared to the arduous hoops the traditional lenders require borrowers to jump through. Similar to other European regions, there might be opportunities for this market to grow if there are underserved markets.
The German lending market feels like it should be fairly stable, but digging into the economic data we can see that the economy is fairly flat. 1% GDP growth in the past year has not been stimulated by the 0% base rate the ECB has held in place since 2016. A yield curve close to inversion points toward a possible recession in the coming years. It isn’t all bad news for German investors though, unemployment at 3.1%, booming house prices (5.2% growth last year) and a reducing volume of business insolvencies (down 3.9% from 2017 to 2018) all point toward a reasonably strong credit environment.
For institutional investors, there are a number of lending platforms where origination can be sought and the macro credit environment is relatively strong, albeit the economy is fairly stagnant and a recession might be on the horizon. The gross returns on offer aren’t the most exciting across Europe, especially once you consider that defaults aren’t included in these numbers, but the opportunity to invest in Europe’s largest economy does come with its own governance and diversification benefits.