Retail Investors: The rebirth of retail P2P

Retail peer-to-peer lending is not dead, but it is evolving. Kathryn Gaw investigates…

Peer-to-peer lending was originally created for retail lenders. A multi-billion-pound industry was built around the concept of individuals lending to other individuals, led by household names such as Zopa and Funding Circle.

But over the past few years, there has been a shift. Institutional backing has become the norm, and has even tempted some big players to leave the retail marketplace. Meanwhile, a challenging combination of economic instability, regulation and rising costs have seen the original ‘big three’ close their doors to retail forever.

Zopa, Funding Circle and Assetz Capital, as well as older players such as ThinCats, Landbay and LendInvest, have all shifted their business models away from retail and towards institutional funding lines. Most recently, ArchOver announced that it was also leaving the retail P2P space due to higher costs and regulation.

It would be easy to see this as a negative for the industry. To the untrained eye – and the mainstream media – P2P is dying. But look a little more closely and something much more interesting is happening. Retail P2P is not dying, it is evolving, and the next generation of platforms has learned from the past. These platforms are regulated, well funded, and extremely innovative. What’s more, they are appealing to a new generation of retail investors.

“As a P2P industry we need to attract young lenders and its something that we’re looking at and talking about,” says Paul Auger, head of products at Kuflink.

“We want to encourage younger investors to set up an investment plan and put in a certain amount each month.

This way we could actually try to capture them as a lender for years and help them build wealth.

“It’s the younger generation that we need to try to capture because we want to build something that will outlive us.”

Younger investors may not be as wealthy as the older investors who have historically been attracted to P2P, but they have a familiarity with technology, and a willingness to take on more risk in the search for better returns. In short, they represent the future of P2P.

“The younger generation have never walked into a bank,” explains Narinder Khattoare, chief executive of Kuflink. “Everything is done on an app.” As a result, Kuflink is currently looking to automate its products and create an app where all lending and borrowing can be done intuitively.

Meanwhile, Plend will soon launch a new retail product powered by open banking, which is set to appeal to younger investors. The consumer lending platform has invested heavily in its technology and has created a unique credit-checking process which resonates with younger borrowers and lenders in particular. Rental records, memberships and online subscriptions are all used to vet prospective borrowers, reflecting the reality of life in 2023.

“Our approach is a bit more bespoke,” says Rob Pasco, co-founder and chief executive of Plend.

“While the recent restrictions on financial promotions of P2P products make this difficult for everyone, the plan for Plend is to keep a mix of both institutional and retail lenders on our platform.”

These restrictions have perhaps caused the biggest headache to those platforms which are seeking to attract new lenders. Following the failure of platforms such as Lendy and Collateral, the Financial Conduct Authority (FCA) introduced a slew of increasingly strict marketing restrictions which have made it harder for platforms to advertise their products to retail investors.

This makes it tricky to get the message across the message that P2P is stable, established and actively regulated, and a great complement to a stock-heavy investment portfolio. As a result, awareness of P2P investing is limited.

This was particularly evident during a recent Dragon’s Den episode, when new consumer P2P lending platform JustLend made a pitch for a £100,000 investment. The five ‘Dragons’ – all business experts in their own right – were in agreement that there is a clear need for affordable consumer credit solutions, and two of the Dragons offered the full investment in return for a small equity share of the business.

In the week after the Dragon’s Den episode with JustLend aired, Google searches for ‘P2P lending’, ‘peer-to-peer lending’ and ‘consumer loans’ rose by more than 10 per cent each. Searches for ‘JustLend’ rose by more than 100 per cent.

It is clear that when people are made aware of the possibilities of P2P lending, they respond to it, especially in the current economic climate. Low savings rates, ongoing stock market volatility and the near-collapse of the cryptocurrency market mean that investors of all stripes are now seeking a new home for their money. In the absence of widespread marketing, they will get their P2P education via word of mouth, and via the media.

Neil Faulkner, managing director of P2P ratings site 4th Way, believes that this lack of P2P knowledge has held some investors back in the past.

“Probably the biggest disappointment for investors in this industry has been their expectation that they will always be able to get their money back early,” says Faulkner.

“The industry has tried to explain that, but not hard enough or often enough. This gradual shift in the industry helps investors to better understand how to invest.”

The retail P2P space looks very different today than it did six-and-a-half years ago when this magazine was launched. Then, a handful of established platforms were growing rapidly, there was great fanfare around the new Innovative Finance ISA (IFISA), and P2P investors were enjoying access to higher returns on eco-friendly projects thanks to government subsidies on wind farms and other clean energy initiatives. However, in 2018 these subsidies came to an end. And last year, HMRC told Peer2Peer Finance News that it had not issued a new IFISA licence since July 2021.

More damaging to retail P2P was the collapse of platforms such as Lendy, Collateral and FundingSecure. These platforms were unregulated, and the FCA has come under ongoing criticism for failing to intervene sooner to save retail money. In response to this criticism, the regulator has taken a much more heavy-handed approach towards retail-focused P2P. New investors must now pass an appropriateness test before joining a P2P platform, and the risks of P2P must be highlighted on every platform website. This can be off-putting to novice investors, particularly when the rewards are not being advertised with quite the same spotlight.

In truth, a Lendy-style collapse is extremely unlikely to occur again. As a result of the FCA regulations, all platforms now have a wind-down plan in place which protects investors from all-out losses. Furthermore, a significant number of platforms are still able to boast a clean sheet with zero investor losses to date.

Despite the disruption of the past few years, P2P returns have continued to be stable and strong. Peer2Peer Finance News analyses have found that IFISA returns have averaged between seven and nine per cent per annum for the past five years, even after losses and defaults have been taken into consideration.

This track record is often  overlooked in mainstream coverage of P2P, but those in the know are quietly pouring more money into their favoured platforms. Unfortunately, in the absence of retail marketing it is institutional investors who are spotting these opportunities, and they don’t always want to share.

“We’ve been talking to institutional funders and they all ask if and when you take an institutional funding line from us do you intend to close down your P2P retail platform,” Khattoare reveals. “Some even ask for priority on loans. For us, the answer is always no.”

Khattoare believes that institutional and retail funds can complement each other. In fact, retail money is often the more attractive prospect.

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“You can grow a business and be profitable by doing pure P2P,” he says. “The challenge you have with an institutional facility is that if something happens in the marketplace, they can instantly stop lending. Whereas retail is more sticky.

“We have no desire to walk away from the P2P lending market,” adds Khattoare. “We want to have diversified sources of funding.”

This combination of retail and institutional funding is another hint at the future evolution of P2P. Institutional funding can help platforms scale and survive expensive growing pains such as new regulation and economic downturns. However, the ability to attract and retain retail funds is central to the industry.

“The most important aspect of retail P2P lending in future is that it will continue to supply attractive, stable lending returns to the vast majority of investors, just as it has done since the sector began in 2005,” says Faulkner.

“The sector has gradually been evolving away from a focus on lower rates combined with provision funds and easy access into a more mature offering in line with what money lending does best: stable, better rates offered to investors who are willing and able to commit their money across lots of loans until borrowers repay them.”

Retail P2P lending has a track record of almost two decades now. It has survived the global financial crisis, Brexit, Covid, and the current recessionary environment, and it is still delivering competitive returns to investors. While the sector may be evolving, targeting new demographics and diversifying its investor base, these fundamentals will stay the same.

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