Consumer lending: Mind the gap
Zopa and Lending Works have left a gap in the consumer P2P lending market. Michael Lloyd examines the new generation of consumer lenders which are taking their place…
The peer-to-peer consumer lending sector has changed significantly in recent years, with some of the largest brands exiting the space. But the emergence of new, innovative market entrants suggests that we are entering a brave new world of P2P consumer lending.
According to every metric, consumer lending is on the rise. Recent figures from the Finance & Leasing Association showed that its members saw a 39 per cent year-on-year rise in new consumer lending business in February.
Meanwhile, the Bank of England’s money and credit statistics showed that consumer borrowing grew by 4.4 per cent annually in the same month, the largest rise since the pandemic, to reach an additional £1.9bn.
There is an enormous opportunity for P2P platforms to take more market share. P2P platforms have a long track record of innovation and use technology to evaluate credit applications more efficiently. For example, some platforms use open banking to better assess creditworthiness, and identify which borrowers may not be able to meet repayments.
Zopa proved the efficacy of the P2P consumer lending model. It was the world’s first P2P platform when it launched in 2005, and it grew to become one of the largest P2P lenders in the country, with cumulative lending of £5.66bn. It chose to exit the P2P market to focus on the roll-out of its digital bank.
Meanwhile RateSetter – for many years one of Zopa’s key competitors in the consumer lending space – was acquired by Metro Bank in September 2020. Since then, the former P2P lender has grown the bank’s consumer originations from an average of less than £2m per month in 2020 to over £50m a month last year.
With big brands out of the picture, newer P2P platforms are able to showcase their own consumer lending products, and there is no shortage of innovation.
Elfin Market tapped into the multi-billion-pound credit card market with the launch of the Elfin Purse in 2019. The Elfin Purse, which is funded by lenders, gives borrowers a credit limit of up to £2,000 with a representative APR of 5.8 per cent. This is much lower than the 21.46 per cent average credit card interest rate in the UK, according to NimbleFins. And the innovation does not stop there.
In 2019, Lendwise launched as the first P2P lending platform focused on education finance.
It allows lenders to fund education loans, which are primarily used by post-graduate students seeking a fixed rate loan to fund their studies. Students pay a 10 per cent APR, on average, while investors can earn approximately nine per cent per annum.
Other P2P consumer lenders are taking full advantage of open banking to maximise their underwriting capabilities.
Open banking is a data-sharing initiative that mandates high street banks to share customer information with approved third parties, in order to boost competition in the financial services market for the benefit of consumers.
Leap Lending is one such platform. The P2P consumer lender launched in December 2019 and uses open banking to analyse 12 months’ worth of bank transactions from borrowers to determine if they can afford the loans.
Read more: European consumer lending platforms show stable growth
By using the data-sharing initiative, platforms can better assess the affordability of borrowers and offer loans to those with thin credit files, giving more consumers access to finance, all while providing a quicker application process.
Meanwhile, Plend is looking to launch imminently with the USP of a credit model based on using open banking.
The platform, which is awaiting final approval from the Financial Conduct Authority before it officially launches, will provide loans of up to £10,000 at 10 to 25 per cent APR, with repayments over one to five years. Investors can earn up to eight per cent per annum.
“For every loan we assign an indicator and score and track it across its journey and if there are any mistakes, we get feedback and adjust it,” says Rob Pasco, co-founder and chief executive of Plend.
“You need to have strong underwriting, and that’s why we built our open banking model from the ground up.”
This year, more platforms hope to launch into this space. Peer2Peer Finance News understands P2P property lending giant Kuflink is considering expanding into the consumer lending sector, while a slew of new consumer lending brands are poised to enter the market with a new spin on the P2P lending concept.
Punk Money is set to launch later this year, enabling friends and family members to lend easily to each other, with the lender setting the interest rate. Users can opt in to report their data to credit bureaus to improve their credit score. Over 8,000 people have already signed up to the waitlist ahead of the launch.
And Loop Money is a new friends and family money sharing app created by Paul Pester, the former TSB Bank chief executive, Anthony Thomson, Metro Bank and Atom Bank founder, and former CompareTheMarket chief Matthew Donaldson.
Similarly, JustLend, which is in beta mode and hopes to launch formally later this year, focuses on the niche of lending between family and friends.
The platform allows borrowers to create their own loan campaigns to raise funds. They can set their own repayment terms, including interest rate and term length, and send the campaign to up to 10 family members and friends to invest in. Investors will earn a small interest rate in return.
Read more: Open banking tipped to evolve into open finance
The platform gives risk scores to its borrowers and creates the loan agreement from a pre-populated form that the borrower fills in.
Lending to loved ones with your own set interest rate can be more attractive than going to strangers and paying more, and works better for finance for personal reasons, such as IVF treatment, which the platform has funded.
“We’re not in the market to be Funding Circle or Zopa, it’s not about strangers when it comes to borrowers and investors,” says Craig Smith, co-founder and chief executive of JustLend.
“It’s family and friends supporting and lending to each other.”
Some platform bosses have forecast an increasing need for consumer finance as the cost-of-living crisis takes hold.
Nadeem Siam, founder of Fund Ourselves, says his P2P platform provides consumer loans which can help borrowers pay their bills.
“With prices going up everywhere there is definitely a growing need for short-term credit and consumer credit,” he says.
Pasco says Plend will not provide loans to pay bills but will allow consumers to consolidate existing debt.
He adds that in a market hit by inflation, he is seeing worrying indicators for lenders to be concerned about, such as people likely to default on their loans.
“Everyone thought Covid would be the recession, but now we’re seeing a decline in personal loans being approved, more lenders are being conservative, and a correction to lifestyles will have an impact on borrowers’ ability to repay, so will affect defaults,” he says.
“We have no existing loans to worry about or consolidate and when we launch we can be more adaptive.”
Read more: Raising growth funding
Investors looking to tap into returns from the P2P consumer lending market need to understand how platforms operate, their target borrowers and interest rates. They must also know the difference between unsecured and secured consumer lending.
Secured loans require collateral, and thus provide security for investors. They also tend to have longer repayment periods and generally are open to more consumers, including those with less than perfect credit history, and allow people to borrow more.
Meanwhile, unsecured personal loans are more flexible for borrowers, requiring no collateral, allowing for earlier repayments and for consumers to choose how long they want to repay.
Lending Works originated unsecured personal loans until its wind-down and makes for an interesting case study.
The platform struggled during the pandemic, pausing lending from April 2020 until the end of January 2021, and even introduced negative interest rates. Borrowers were given payment holidays during the crisis, delaying investor repayments.
This could be seen to show the risks of unsecured consumer lending during periods of economic uncertainty. However, chief executive Nicholas Harding says that the platform received minimal complaints during the pandemic.
While secured consumer lending can seem like the safer option, it brings its own challenges.
Pasco says adding security to small consumer loans can prove a lot of “hassle” and too expensive so instead Plend will offer unsecured consumer lending backed by good underwriting and open banking, to prevent defaults.
“People earn income and don’t accumulate assets in the same way as in business, so having to collect a defaulted loan repayment becomes very hard,” he says.
“The security is knowing what factors are important in the lifecycle, we don’t incorporate assets in the loan agreement as it’s too expensive. It comes under origination, underpinned by open banking.”
With a growing consumer credit market to service, P2P platforms are well placed to thrive and grow this year and beyond. The roll-out of open banking and other innovations will help them set themselves apart from high street banks.
With a raft of platforms gearing up to launch, this could be a new era for P2P consumer lending.
Read more: Demand for consumer lending rises
