Retail Investor Motivations and Behaviours in P2P Lending

By Jordan Stodart | On April 25th, 2018
Retail Investor Behaviour in P2P lending

There are a number of factors which contribute to “why” a retail investor will introduce peer to peer lending (P2P) into their portfolio. For institutions, which emerged and contributed to capital inflows in recent years, the promise of yield was a strong proposition. While this primary benefit similarly holds true for self-directed retail investors, we are seeing a shift towards investors seeking stable yield and diversifying away from asset classes exposed to volatility. Aside from these core benefits, we explore other motivations and investment behaviours exhibited by retail investors in P2P.

 

P2P Lending Investor Demographic

First, it’s worth highlighting the core demographic investing in P2P (retail only). Within the industry, the demographic is generally considered to be male-oriented, 45-55+, investing for income or capital preservation (commonly for retirement), capable of measuring risk in line with their own appetite, and frustrated by poor returns on cash and the volatility traditional assets experience.

 

The Cambridge University Entrenching Innovation 4th Alternative Finance Report published recently confirms this. (Data taken from an Investor Survey with over 8,000 participants)

 

Cambridge Report: Investor Demographic
Figure 1: Funder Age by Model, 2014 vs 2016, source: Cambridge Report 

 

You can download the Cambridge Report here.

 

Note: P2P property lending data is included within P2P business lending.

 

When comparing the 2014 data, there’s a notable increase in investor age across both peer to peer lending models. The proportion of over 55 investors in P2P business lending increased 10% from 2014 to 2016. For P2P consumer lending, the increase was 11%. Investors aged 35-55+ comprised 92% of the investor-base for P2P business lending and 91% for P2P consumer lending in 2016, highlighting the emerging demographic trend of an increased proportion of older participants.

 

Retail Investor Motivations

Note: The findings below generally correspond with P2P consumer lending and P2P property lending, so for the sake of expedience I have chosen to display P2P business lending only.

 

P2P Business Lending 

The Cambridge Report concluded that for those investing in P2P business loans, generally, investors view their investment as a viable alternative to fixed income investing (32% viewing as ‘completely like this’ and 39% as ‘mostly like this’). Falling closely behind is the perception that funds are considered as ‘free cash’ or ‘disposable income’. 39% of investors perceive their investment as ‘money towards retirement saving’.

This is a clear indicator that income and capital preservation are not being fulfilled by other asset classes, and that spare cash would be better placed in a stable, higher yielding alternative to traditional options; this does not represent mass-market sentiment and is restricted to the 8,000+ surveyed, of course.

 

Cambridge_Report_Investor Motivations

Figure 2: Lenders’ Perceptions of Funds Relative to their Peer-to-Peer Business Lending Activity, source: Cambridge Report

 

Retail Investor Behaviours

P2P Business Lending 

The key factors which influence investor behaviour have consistently pointed to financial return and portfolio diversification. With cash rates yielding near zero returns and equities and bonds exposed to volatility, as was seen with the recent market correction earlier this year, it is little surprise that investors turn to P2P which has characteristics of stability and predictability as well as attractive risk-adjusted returns.

According to the Cambridge Report, 86% of survey respondents considered ‘diversify my investment portfolio’ as ‘Very important’ or ‘Important’. You can further diversify within P2P lending, ensuring your risk is spread as much as possible. Several major P2P lending platforms offer auto-bid functionality, a function which spreads your capital across multiple (often dozens) borrowers.

Cambridge_Report_Investor Behaviours

Figure 3: Factors that Influence Lender Behaviour in Peer-to-Peer Business Lending

 

From our own experience as a recent investment solution provider, these factors ring true. Cash is being eaten away by inflation and market fluctuations are causing anxiety for investors with portfolios that are heavily weighted to stocks and shares; a stable alternative is much sought after. Additionally, however, we are finding that investors are increasingly seeking diversification across platforms to mitigate platform concentration or over-exposure to a single sector. This is something which can be achieved by investing with Orca, or by ensuring you build a well-balanced portfolio after careful research is conducted.

 

 

 

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Important Considerations for Retail Investors

If you align with the above demographic and exhibit similar investor motivations, but have minimal or no experience in P2P investing, here are a few important factors to consider when investing:

 

  • Build a balanced portfolio

 

As mentioned above, it’s key that you spread risk as much as possible. P2P lending is not a savings product, your capital is not covered by the Financial Services Compensation Scheme (FSCS) and over-exposure to a single platform which is unlikely to have weathered an economic downturn should be taken into consideration.

 

  • Consume independent research when conducting due diligence

 

Comparing key metrics like net returns, default rates, bad debt rates and liquidity will enable you to view platforms which have varied models with greater accuracy. You can review research and analysis conducted on some major platforms with Orca, but there are other research providers which will also support your due diligence.

 

  • Consider the amount you allocate to P2P within your broader portfolio

 

The key characteristics of P2P, namely stable and attractive yield, make it a viable asset class to diversify your portfolio with. However, you should be conscious of the amount you allocate and avoid platform concentration which could, ultimately, harm your overall portfolio. Approximately 5-10% of the portfolio initially and building over time is common, however it is entirely dependent on your circumstances and portfolio objectives.

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