UK P2P versus the world
UK peer-to-peer lending platforms have faced challenges when expanding abroad, but the tide may be turning thanks to their innovative approaches. Michael Lloyd reports
Peer-to-peer lending was born in the UK in 2005, but since then it has spread into almost every country in the world.
Despite pioneering the global P2P industry, few UK P2P brands have ventured overseas, with industry experts citing a variety of challenges including different regulatory and lending environments.
But that may now be changing, as savvy P2P firms adapt and innovate with their expansion plans.
Before entering new markets, there are a number of things for P2P firms to consider, including the different levels of risk and pricing of loans in that country, its financial infrastructure and how it will attract investors and borrowers.
All of this requires thorough market research, consulting with lawyers and working with local experts by partnering with local lending companies or acquiring lenders – extremely costly ventures with no guarantee of success.
Simon Deane-Johns, a consultant solicitor for Keystone Law who has advised P2P platforms and was general counsel at Zopa, says that platforms need to be prepared to do their homework before entering a new market.
He describes marketing to overseas investors and borrowers as a huge challenge and says that there is a significant amount of market research required before platforms consider launching overseas.
“There are loads of things that a firm has to consider when expanding to another country or market, like a marketing strategy, obviously another language potentially and the preference of customers for not only national brands but also brands they are familiar with,” he says.
“P2P firms also need to consider consumer preferences for the products on both sides of the market, what the borrowers’ attitudes are to credit in the relevant market, how easy it is for them to get credit, whether there is a gap P2P lending can help fill and if credit information on borrowers is readily available.
“And on the lender side, P2P platforms need to ask what type of product they would be competing with in the relevant market and what customers’ attitudes are like for those products and new ones offered.
“We’ve seen some examples of P2P expansion but it’s quite difficult for a UK business to address all of those challenges in another market which might already be served by existing P2P lending platforms.”
Assetz Capital, which is now the UK’s biggest P2P lender, has notably been reticent to expand internationally.
“We considered it in the past, but the market is so big with Assetz Capital we could comfortably build a £5bn to £10bn loanbook here in the UK and it takes a lot of focus to achieve that, and I think given the property laws and rules are different it would take a lot of risk to understand while the market here is already big,” says chief executive Stuart law.
Law goes on to say that his firm owns the Assetz trademark across Europe and some parts of Asia, to be prepared in case it wants to launch abroad in future.
“We are ready for it but it’s not the right time, there is plenty to do in the UK,” he adds.
Former ‘big three’ P2P platform Funding Circle makes an interesting case study. The business lender, which recently exited the retail P2P space, was at one point a success story for UK P2P growth overseas. While other players focused on the domestic market, Funding Circle launched in Germany, the Netherlands and the US, with Canada on the horizon.
But in 2019, it shelved its Canada plans, and in 2020, the lender withdrew from Germany and the Netherlands because of slower-than-expected growth.
Conversely, it has thrived in the US, where it was given a boost from its participation in the country’s Covid loan scheme. In an interview with Peer2Peer Finance News last year, then-chief executive Samir Desai would not disclose the split of government-backed loans and non-government-backed loans on the platform, but it is clear that its delivery of Paycheck Protection Program loans has played a key part in its US success.
Funding Circle’s history of expanding overseas may serve to highlight the specific challenges of entering continental Europe in the past. The market was fragmented with an array of regulatory frameworks and languages to navigate.
However, that may all be about to change thanks to new EU crowdfunding rules that aim to create a harmonised regulatory framework across the bloc, meaning that authorised crowdfunding platforms can easily passport into other EU member states.
This passporting means that UK platforms can in theory launch in one member state to operate across all 27. The rules also benefit investors, as all platforms must be transparent about returns and interested parties.
Read more: Do the new EU crowdfunding rules threaten UK P2P?
Oliver Gajda, executive director of the European Crowdfunding Network – or ‘EuroCrowd’ – says the harmonised rules present an opportunity for UK platforms to enter the EU market more easily.
“There is a relevant market opportunity,” he says.
“Expansion into Europe has been made as easy as it can be expected under any professional financial services regulation. It does not come cheap, but we need to understand what the intention and impact on the existing market will be.
“The benefit of, say a UK entry to the market, is that they have no legacy with a specific legislation and can choose freely the most appropriate member state to apply for their licence.”
UK P2P property platform LandlordInvest is one player considering taking advantage of a harmonised European market.
Co-founder Filip Karadaghi said he is considering expanding his platform into Europe “one day, hopefully”, as the specialist property finance market in the UK is very saturated.
“Europe is an attractive, huge market with space for expanding in,” he says.
“There are very few established property platforms in Europe which are active across the whole continent.”
Looking away from Europe, the US and Australia are obvious expansion targets for UK P2P firms due to the language and cultural similarities. However, platforms should not be fooled that this means they are easy markets to crack.
Law says Assetz Capital previously conducted extensive market research about the possibility of a US launch.
But after looking at the landscape of regulation, different property lending rules and the distinct national lending culture with higher interest rates, he decided against it.
Deane-Johns says that Zopa looked at launching in Australia but concluded that the challenges a UK team would face trying to launch a business there would be “very costly” compared to the benefits they would receive. They ultimately nixed the plans.
He adds that the platform also tried entering the US but also chose not to pursue this because it would mean spending a lot of money to comply with a “very challenging regulatory environment”.
“I’m not saying people wouldn’t attempt it but from Zopa’s standpoint we looked at Australia early on and discounted it and tried in the US for a long time and that wouldn’t work in a truly P2P way and would be very expensive as a securitisations model that wasn’t going to be truly P2P,” he says.
Industry stakeholders have mixed views about the feasibility of the US and Australia markets for UK players, indicating that success may come down to the suitability of an individual business model or the sector it operates in, rather than a broad-brush approach. While Funding Circle has had success in the US, for example, that does not mean that every UK P2P firm can expect to make it on the other side of the pond.
Some platforms are opting to expand Down Under. CrowdProperty launched in Australia last May, with UK chief executive Mike Bristow saying at the time that the residential development lender “is a perfect fit for the Australian market”.
Since then, it has raised AUS$1.5m (£842m) in an oversubscribed seed funding round backed by tech entrepreneurs and property professionals. It has fully funded two phases of a development project in Australia raising AUS$952,500, with more projects currently live on its platform.
Crowd2Fund is also eyeing Australia, as well as the EU market.
The business lender is seeking authorisation from the Australian Securities and Investments Commission to open in Australia as a test market and is also in talks with Malta’s financial regulator to launch in the EU.
“There is an opportunity to broaden our proposition and provide not just private capital for investment but banking services via smartphones within developing markets,” says Chris Hancock, chief executive of Crowd2Fund.
Meanwhile, JustUs is working on launching in both the US and the EU. It has opted to establish its European base in Estonia, while its sister company Moneybrain has confirmed its initial registration as a money service business in the US and partnered with Visa to roll out its P2P lending on a state-by-state basis this year.
“It makes sense to launch to access international capital and for an international business like ours with our cryptocurrency BiPS,” says Lee Birkett, chief executive of JustUs.
And some platforms are looking to make their mark in other parts of the world.
Earlier this year, Shojin Property Partners raised over £850,000 for its first international project outside of the UK, in Malaysia, while also working on expanding into India and the UAE by finalising deals to distribute its products through local partnerships in both countries.
“Through expansion we can cover more markets, providing developers with access to much needed capital to build homes and create jobs, while providing investors with more options to make their savings work harder,” says chief executive Jatin Ondhia.
Platforms have historically struggled or decided against launching overseas due to an array of challenges such as facing different lending and regulatory environments. This has left UK platforms to build innovative and expansive businesses at home, leading to the diverse P2P environment that we know today.
However, the ability to scale is vital for the future success of these platforms and overseas expansion must seem like an obvious next step for ambitious platforms. Once they crack the formula for global domination, there will be no stopping UK P2P from truly taking over the world.
