In little more than a decade, peer-to-peer lending – P2P for short – has moved rapidly from niche upstart activity to the investment mainstream, with a continual and impressive rise in lending and an increasing appeal to financial advisers and their clients. The Treasury has even created a special tax-favoured vehicle for P2P investment.
Yet despite this sanction of respectability, P2P remains, in too many cases, the investment world’s best-kept secret. To some it remains novel, untried and potentially risky. What do we know about those managing the lending platforms? Perhaps more pertinently, what do we know about their lending criteria, underwriting processes and customers, the borrowers?
I’ll address those points in a moment. First, what is P2P, how big is it and what makes it a unique and attractive asset class?
P2P lending is at the same time the very latest and the oldest form of credit.
The latest, because without digital technology and the consequent ability to transact business simultaneously across any distance among large numbers of people, there would be no P2P sector. The oldest, because long before there were banks or finance brokers, people with money to spare lent it to those in need of it for whatever reason – business or personal.
P2P platforms allow the former to find the latter more efficiently and more rapidly than would have been the case in years gone by. Critically, while replicating the time-hallowed practice of one person lending to another, P2P platforms use contemporary technology to allow such lending without any prior knowledge of the borrower. This ancient-yet-modern credit model landed in the UK in 2005, with the arrival of the Zopa platform. Since then, the rate of growth has been impressive, to put it mildly. Little more than a decade later, there were 50 P2P platforms and lending grew in the two years 2013-2015 alone from £480 million to £2.4 billion. More recent figures show that from 2014 to 2016, lending grew from £1.25 billion to £3.15 billion. In the Spring of 2017, the year-to-date number was already £1.4 billion, and the cumulative total for the industry since its inception in the UK is £8.9 billion at the time of writing.
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These are impressive lending figures. So who are the borrowers? There are three types: consumer, business and property borrowers.
The consumer takes the largest share of the lending, in the cumulative all-time total and the figures for both 2016 and the year-to-date, respectively £4.2 billion (46 per cent), £1.4 billion (44 per cent) and £0.63 billion (44 per cent).
Next is lending to business, taking £2.9 billion of the cumulative total (33 per cent), £1.13 billion (36 per cent) of the 2016 lending and £0.48 billion (34 per cent) of the year-to-date figure.
Last is property lending, which accounted for £1.84 billion of the cumulative total (20 per cent) and £0.65 billion (20 per cent) and and £0.32 billion (22 per cent) of the 2016 and year-to-date figures respectively.
Finally, who are the lenders? Currently the “big three” – Funding Circle, RateSetter and pioneer Zopa – account for nearly 70 per cent of the cumulative total.
From the investor viewpoint, P2P lending has a number of attractions.
The first is yield. In today’s low-return landscape, P2P lending returns on average a very respectable five per cent a year.
The second, as I touched on earlier, came with the launch on April 6 2016 of the “Innovative Finance ISA” (IF ISA), a variant on the ever-popular tax-efficient Individual Savings Account that accepted P2P loans as an asset class eligible for inclusion.
A third attraction is the ability of P2P investment to provide genuine diversification for a portfolio. P2P offers the chance to invest across the economic and stock-market cycles, as P2P investments are not listed on any exchange thus are immune from market volatility.
Apart from the generally depressive effect of an economic downturn on the ability of people and businesses to service their loans, P2P lending is uncorrelated with these wider trends.
All this addresses in part some of the concerns I noted earlier, those that continue to make some people wary of P2P investment. Its track record over the last decade or more should squash suggestions that it is some sort of novel activity, untested in the white waters of the highly-competitive financial services market. The growth in the lending figures suggest that this is an asset class that has truly come of age.
But what of the anxieties about risk, which are closely connected with the questions as to who runs the platforms and who are the borrowers?
First, it is right to acknowledge that there has been a substantial data gap in the industry until very recently. A lack of credible, robust, independent research, allowing advisers and individual investors to benchmark P2P platforms, has done little to allay concerns about the resilience of the industry and its ability to make good use of investors’ money.
The good news is that things are changing, although there is some way to go. An increasingly rich information environment is increasingly making it possible for advisers and their clients to sift the different platforms and select those whose performance fits with the risk appetite of the investor in question. They can compare historical default rates, total loans made by each platform (the more that has been lent, the more experienced the platform is likely to be) and whether or not a particular platform automatically diversifies investors’ risk exposure by breaking their investment into smaller chunks and distributing them among many borrowers. Moreover, services exist which provide qualitative insight to support analysis conducted, helping financial advisers in their due diligence. Compliance and other adviser concerns are similarly addressed in an effort to instil confidence in the selection and recommendation process.
Of course, P2P lending is a relatively-illiquid investment compared with bonds and equities and is not covered by the Financial Services Compensation Scheme. But, as the growth figures show, it is proving increasingly popular with investors seeking yield, diversification and the attractive tax regime of the IF ISA.
The investment world’s best-kept secret is fast becoming an open secret, and that has to be good news for investors befitting the P2P profile everywhere.
If you have any comments on this article please email CEO of Orca, Iain Niblock on [email protected].