What does the future hold for P2P lending?

What does 2022 hold for the UK’s peer-to-peer lending sector? Michael Lloyd finds out…

The peer-to-peer lending sector is at a turning point in its evolution. No longer the new kid on the block, the past couple of years have seen P2P platforms enter the mainstream, offering government-backed loans, inflation-beating returns, and unprecedented support for small- and medium-sized enterprises (SMEs).

16 years after Zopa launched the world’s first P2P platform, the sector has survived two economic downturns, launched its own tax wrapper, and even embarked on initial public offerings (IPOs).

Platforms are growing, expanding into new markets and continuing to innovate. What the industry wants in the year ahead is more respect.

“I’d like to see public support for our innovative products, regulatory or from the government,” says Lee Birkett, chief executive of JustUs.

“We want true support for fintech. Not once was fintech mentioned in the Budget and that is concerning.”

Industry stakeholders have made a strong case for the sector as a force for good. During Covid, several P2P platforms took part in the coronavirus business interruption loan scheme (CBILS) and bounce back loan scheme (BBLS), while others managed to navigate the economic downturn with low levels of default while continuing to produce consistently strong returns for their investors.

“The impact of the pandemic on outstanding loans has not fully played out, but so far the industry has held up very well and even better than expected,” says Neil Faulkner, managing director of P2P ratings and research firm 4thWay.

“The industry has demonstrated through two recessions that these investments are high quality and provide a complementary alternative to the stock market.

“The main story for the P2P sector over the next 12 months is that lending volumes will grow, most likely surpassing the pre-pandemic peak in investment again. I think there will also be a few soft wind downs, caused by the pandemic, increasing regulation and failure to achieve scale.”

Despite the economic impact of Covid, several platforms have embarked upon ambitious expansion plans.

CrowdProperty has launched in Australia, JustUs is working on rolling out across Europe and the US, European P2P platform EstateGuru has revealed it aims to expand into the UK in January and Zopa is planning an IPO at some stage in 2022.

The sector has also continued to cater to a wide range of both institutional and retail investors, and platforms have pledged to continue to support retail lending in the year ahead.

“We absolutely believe that retail lenders have a future,” says Stuart Law, chief executive of Assetz Capital.

“Absolutely people will be putting some of their money into P2P and expect it to grow over time. Especially after people saw it has performed very well, passing through the economic cycle and pandemic.

“Inflation is looking certain to be very substantial, the conditions are the worst savers have seen for many years and there is no hope of the bank savings rate going up so P2P looks stronger in some ways than it has ever been.

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“The Financial Conduct Authority (FCA) is pushing people to consider investing more money, as saving equals losing money. Saving is producing guaranteed losses, whereas investing is possible losses and possible gains. I think that’s the big thing for the next year.”

Having survived the Covid-19 crisis, the P2P sector is now predicted to enter its next stage of growth.

But there are a few challenges on the horizon.

Further regulation for the sector is expected with the City watchdog set to announce a policy statement in the second quarter of next year on strengthening financial promotions for high-risk investments, which could see new restrictions on retail lending.

Platforms have criticised the FCA’s classification of P2P lending as ‘high risk’, pointing out that it is hurting the industry by placing it alongside the likes of high-return bonds or mini-bonds, unregulated collective investment schemes, land banking and cryptoassets.

“I’d like to see P2P taken out of the crosshairs by the FCA,” says Law.

“Putting P2P in the same bracket as crypto and land banking is really disrespectful and there are some really professional organisations with career professionals working in lending and credit and to be put in that box with scams and crazy high-risk things is very disrespectful.

“That’s what I’d like to see change, P2P to be given the respect I believe it’s now earned over the last 10 years or so for those larger and more established enterprises that have proven they can run a good business and should be treated as medium risk, not put in a high-risk category.”

Earlier this year, a survey by the UK Crowdfunding Association (UKCFA) found that retail investors have a good understanding of risk in regulated crowdfunding and P2P platforms.

“We’d like to see an approach to high-risk investments that more clearly differentiates between unregulated investments and regulated platforms,” says a spokesperson from the UKCFA.

“Beyond that we are still pro regulation, we think it helps but it should also encourage competition and innovation.”

Looking beyond regulation, some P2P platform owners and stakeholders forecast increased adoption of technologies such as open banking and blockchain.

Kuflink is working on implementing open banking for real-time borrower verification, payments and to improve processes, while Lendwise is looking to use it to help assess creditworthiness. New P2P consumer lending platform Plend is launching with the requirement that borrowers and investors both opt in to use the data sharing initiative.

Invest & Fund and Simple Crowdfunding have also expressed interest in open banking.

“There will always be technology changes, that’s part of the beauty of what this is about,” says Atuksha Poonwassie, co-founder and managing director of Simple Crowdfunding.

“Customer journeys will improve, and platforms are constantly evolving.

“I think like blockchain, more platforms will embrace open banking, it is absolutely on everyone’s radar I’m sure. Potentially more platforms will look at artificial intelligence as well.”

4thWay’s Faulkner believes that more P2P lending companies will implement open banking and blockchain, but there won’t be a mass rush until the “trailblazers” show the scale of the business advantages these technologies offer.

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“The P2P lending sector will continue to implement new technologies as they arise,” he says.

“Some of these technologies will incrementally improve efficiencies, credit analysis or customer service.”

As well as additional innovations, some stakeholders predict more merger and acquisition (M&A) activity in the sector.

“There was less consolidation than I had expected over the past couple of years, but surely the pandemic was part of that,” says Faulkner.

“Undoubtedly, there will be some more mergers or acquisitions, but at present a large number of platforms have space to grow organically and are focused on that.”

JustUs’ Birkett predicts plenty of deals on the horizon, and for P2P to go global with the rise of cryptocurrency.

“There will be a lot of fintech M&A,” he says.

“With crypto, P2P is global, I think the growth will be cross border. The barrier to entry is higher so more experienced players can enter other markets. That may encourage M&A activity.”

However, Filip Karadaghi, managing director of LandlordInvest, disagrees.

He points to Starling Bank’s acquisition of Fleet Mortgages in a £50m cash and share transaction as an example of a buyer with the strategic motivation and capital to purchase an attractive seller with a huge loanbook worth over a billion pounds. And he does not see the same formula present in P2P.

“Few platforms have a loanbook of that size or bigger so any M&A pricing or transactions probably wouldn’t happen,” Karadaghi says.

“You need a buyer with capital, and I don’t think any P2P platforms are attractive for any buyer.”

2022 is sure to bring plenty of surprises for the P2P sector, whether through regulation, M&A activity, new technologies, or economic shocks. But over the past 16 years the sector has shown that it has the ability to weather all types of storms.

It has already overcome its growing pains and dealt with the obstacles of an economic downturn and the reputational hit from high-profile platform collapses.

The industry is on a continued growth trajectory, with investors predicted to flock to the sector to diversify their portfolios amid soaring inflation.

We know that P2P platforms can adapt to any economic environment. We know that they can continue to keep default rates down and lender rates up.

P2P lending has grown to become an important part of the UK’s financial services sector, filing a gap in the market and bringing flexibility and liquidity to the notoriously conservative lending sector. P2P platforms have shown what they are capable of doing – maybe 2022 will be the year that they finally get the respect that they deserve.

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