Peer-to-peer lending started in the UK but has since expanded and evolved internationally. Hannah Ganage-Stewart explores how P2P is maturing across the world
Peer-to-peer lending platforms have proliferated across the world since the launch of Zopa in the UK in 2005. For example, Europe and the US now have alternative finance offerings that, while not necessarily P2P in its purest form, take their lead from those early UK initiatives.
In the UK, some of the early platforms have either left the market entirely or moved away from pure P2P. Zopa, for example, transformed from a P2P lender into a fully-fledged bank after it received a UK banking licence in June 2020.
This is a familiar story across Europe and the US, where major platforms have tended to move towards institutional investment models and exit the retail investment side of the business.
For market analyst Neil Faulkner from 4th Way, this gradual drift towards institutional investment is a sign of the market maturing. “You expect there to be a lot of institutional investment in any high-quality investment,” he says. “Europe’s still catching up but it’s still got a reasonable amount.
“If you talk about the actual size of these platforms, the US, for example, is the most consolidated with larger platforms, and it has a greater total investment, for two reasons. One reason is that investors have a domestic bias, so the US market is internal whereas Europe is separate countries, and obviously people prefer to invest in their own countries. The second is wealth, and the US and Europe, including the UK, have roughly similar sized economies but personal wealth in America is far higher compared to Europe, so each person has more wealth to invest.”
Tighter regulation across all jurisdictions has also led to a maturing of the market. Many platform leaders would argue this has stifled innovation on the retail investor side, but on the other hand it enables them to operate with greater clarity of what the regulatory expectations are.
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And it’s clear that while the market may have matured and consolidated into a few major players in the biggest markets, there are still P2P platforms out there looking to fill the gap in the market for alternative credit for those who are unable to access finance from banks or traditional lenders.
These businesses are closer to the origins of P2P but are not necessarily the major players in the industry. Elsewhere, the largest platforms have been moving toward a model more akin to traditional lenders, enabling them to secure licences and expand their offerings.
“If you look at the old capital lending space, then this notion of an applied P2P approach in funding has very much subsided,” explains Martins Sulte, chief executive of Latvia-based P2P lending marketplace Mintos.
“It is very hard to run the business when you have to cater to both investors and the borrowers. The margins are super slim, and there’s always an imbalance of funding availability on one side and the borrowers on the other side. It is very hard to balance.”
Mintos recently received an investment firm licence and electronic money institution licence from the Latvian regulator, the Financial and Capital Market Commission (FCMC). It enables the firm to offer more products and to operate across the EU and the European Economic Area. In particular, it has been developing its own exchange traded funds (ETFs).
“We are basically a brokerage house with a European brokerage licence and in future we’re going to passport that licence across Europe and will officially launch in some of the markets where we haven’t been before, and we will be much more present and active in the markets where we already have some operations,” Sulte explains. “The first few markets will be the bigger markets, so Germany, France, Italy and Spain.”
Europe has one of the highest individual savings rates in the world, according to a regulatory update by think tank Eurofi in February. It states that Eurozone members save around 12.4 per cent of their gross disposable income each year, compared to just 7.2 per cent in the US.
Despite this, Eurofi cites data from the Organisation for Economic Co-operation and Development, which says the rate of retail investor participation in capital markets is on average lower in the EU than in the US. Around 32 per cent of EU households’ financial assets are held in securities, compared to 54 per cent in the US.
This may present an opportunity for European P2P platforms, at a time when new EU-wide regulations are being introduced to harmonise the industry.
This month was supposed to close a year-long transition period to introduce the European Markets and Securities Authority’s European crowdfunding service providers regulation (ECSPR), which aims to bring nationally regulated P2P and crowdfunding platforms in Europe under one framework.
The rules will enable platforms to operate in all 27 European member states and carry out cross-border transactions. The burden of moving to the new regime has proven difficult for some, so the transition deadline now ends in November 2023.
A harmonised regulatory framework should boost Europe’s P2P market, as it is currently very fragmented. It is harder to manage the regulatory requirements across jurisdictions and the platforms tend to be smaller, making that regulatory burden expensive.
In contrast, the US benefits from being one homogenous market. There are anomalies in the US where some state laws make regulation across all states complicated, but overall, large platforms operate across more than 40 states.
One US platform that is booming and sticking close to the original P2P model is SoLo Funds, which was co-founded by president Rodney Williams in 2018. The platform enables investors to lend small sums to borrowers who borrow on a short-term basis and have the choice of repaying the loan with a voluntary tip to the lender.
“We didn’t decide to do P2P,” Williams explains. “It was more about us trying to find the solution. We wanted the community to benefit from the lending activity. And that’s what happened.
“My favourite stat is 82 per cent of our lenders also live in underserved neighbourhoods. Okay. So they understand it. As a company we’ve distributed over $12m (£10.2m) in tips back to our lending members, and that’s what community finance is about.”
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And while the model may sound too altruistic to work, SoLo is growing and now has around 800,000 users. Williams says, unlike his predecessors, 80 per cent of that growth has been organic. There has been very little fundraising. Williams believes that SoLo, while true to the P2P ethos of democratising access to credit, has benefited from focusing on the sub-prime market in the US.
“Our predecessors tended to focus on much larger loans with the higher quality borrower,” he comments. “So there were loans for over $1,000, or a few thousand dollars to tens of thousands. And one of the differences that we made is that we went to the sub-prime markets, we went to pretty much the lowest credit market in the US and focused on providing them with short-term loans.”
Williams’ success with SoLo shows that there is still a massive need for the core ethos of P2P – connecting individual investors with individuals underserved by the traditional credit markets. As recessions roll out across the world, it is likely this demand will only grow.
With promising new regulations in Europe and the continued growth of P2P in the US, the industry is set to prosper and cement its place in the global alternative finance landscape.