Innovation in P2P: The next big thing
Peer-to-peer lenders are innovation experts, but regulation and economic strife are forcing platforms to think outside the box once more. Kathryn Gaw reports…
In times of economic turbulence, innovation thrives. And no sector has better demonstrated this trend than peer-to-peer lending.
P2P lending rose from the ashes of the 2007-2008 financial crisis, offering an alternative to high street banks for both borrowers and investors. As the sector grew in popularity, new technologies were embraced. P2P lenders were among the first to onboard open banking capabilities, and to use algorithmic credit checking software to speed up decision making. They have been the pioneers of the Innovative Finance ISA (IFISA), and have adapted to a raft of changing regulations over the past few years, working closely with the Financial Conduct Authority (FCA) in the process.
Now, as the P2P sector approaches its 20th anniversary, the economy is once again in flux. Rising interest rates, a cost-of-living crisis, a chronic nationwide housing shortage and a lack of business financing are heaping pressure on households, with no end in sight.
Read more: FCA cracks down on financial promotion approvals
Unsurprisingly, P2P lenders are once again stepping up by offering new products and services in response to the changing economic environment. Platforms are now looking towards artificial intelligence (AI) and other forms of machine learning, creating new paths for customer acquisition, introducing crypto lending services, and moving into new geographical markets.
“If you stop being innovative you’ll become stagnant and then you’ll get left behind,” says Gurbinder Ghuman, head of investor relations at Kuflink.
“You have to get at the forefront of innovation to keep up with current trends.
“AI is the big hype now and we can use those tools to integrate new technologies. We believe the future is going to be the phone. We already have an app and we’re already using AI so we just need to bring them all in line.”
Last year, Kuflink stated that AI is “the next frontier for lending”, and revealed that it had already begun building support algorithms to predict future trends based on historical data. The platform is currently looking into AI-powered chat boxes and other possible solutions which can streamline its investor process.
Meanwhile, Islamic P2P platform Qardus uses machine learning for its credit risk scoring, and Crowd2Fund’s automated investing tool SmartInvest incorporates AI.
“AI has been around for ages,” says Ghuman. “Its something that we are learning more and more about and trying to see where it is best placed and suited for our space, whether it be for signs-ups, or as a chat robot. It’s a powerful tool.”
Read more: Regulation special report: Status: It’s complicated
Other platforms are keeping an eye on the crypto space as a potential future source of growth and innovation. Last year, Moneybrain – the sister company of P2P lender JustUs – secured temporary permissions from the FCA to offer its crypto trading services. However, since then, the regulator has clamped down on the crypto market, making it harder for new entrants to move into this area, and for existing players to market their products to new investors.
Lee Birkett, founder of JustUs and Moneybrain, believes that P2P and crypto lending are natural bedfellows, and should be allowed to operate in similar ways, using the same underlying technology.
“When investors and lenders are matched on P2P its just a one-to-one transaction,” Birkett says. “Crypto is also one-to-one.
“Our crypto is built on top of our P2P platform and so is everything else. The future is P2P lending via crypto. But the problem is the regulator won’t let you do it.”
Earlier this summer, the FCA debuted a series of new crypto asset marketing regulations which were immediately recognisable to any P2P stakeholders.
Similarly to the FCA’s P2P marketing rules, from 8 October 2023 all businesses marketing crypto assets to UK consumers will need to introduce a cooling-off period for first-time investors. The regulator has also banned ‘refer a friend’ bonuses and all crypto firms are now required to put clear risk warnings on their websites, and to ensure that adverts are clear, fair and not misleading.
[Editor’s note: Since this feature was written, the FCA has extended the deadline for crypto firms to comply with certain elements of the new rules.]
These new rules make it harder for new crypto lenders to establish a presence in the UK, at least among retail investors. As a result, crypto firms such as Moneybrain are leaving the country.
“The problem is the UK hasn’t got the regulation yet,” says Birkett. “Its being done in a lot of countries – in the UK they just put their hands in the air.”
Moneybrain recently opted to relocate to Jersey, where it can continue to operate its crypto lending business. Birkett now believes that the future of crypto lies overseas. He intends to apply for a European Crowdfunding Service Providers (ECSP) license, with a view to opening a new office in Paris within the next two years.
“The UK government has acknowledged that crypto lending will form part of the second phase of crypto laws and regulations, but that’s not going to happen until 2025,” Birkett explains.
“So we will be looking to launch in 2024 in Europe from Paris.
“Europe holds more promise for P2P than the UK. Ironically, European P2P will be able to serve the UK and Europe while the UK can’t even serve its own consumers.”
The European P2P market has always been less mature than the UK market, but thanks to a combination of Brexit disruption, FCA regulations and economic volatility, Europe has been gaining on the UK, at least in terms of P2P innovation. Across the Channel, there are more than 100 active P2P lending platforms, offering loans on a wide range of assets such as land, solar panels, property, businesses, and consumer credit.
European P2P stakeholders believe that the new Markets in Crypto Asset (MiCA) regulation will present new opportunities for innovative fintech companies. However, these opportunities may not extend to retail investors.
“Some platforms already use distributed ledger technology (DLT) in the back office and have also run tokenised campaigns,” explains Oliver Gajda, co-founder and chairman of the European Crowdfunding Network.
“The temporary DLT pilot regime will allow for experimentation here, so we should see more of this in the future.
“There have also been some attempts at crypto-only platforms, but the main issue has been usually that crypto has not been allowed for securities (some member states have clarified that crypto transactions will fall under securities law if they act as securities) without the same regulatory burden as traditional finance. The benefit of crypto in that case has been the back office benefits.”
Both Kuflink’s Ghuman and JustUs’ Birkett believe that the European market is where the latest innovations are happening in P2P, and most P2P insiders have openly called out the FCA’s heavy handed approach towards regulation for hindering growth in the sector. Birkett says that Europe is “eating the UK’s lunch” by benefitting from the innovative practices of UK P2P, without the crippling regulatory burden.
Read more: European P2P sector forecast to become more competitive
“The sector is being asked to respond to unprecedented levels of regulatory changes – from financial promotions to secondary markets – and the ongoing uncertainty that creates makes it challenging to invest in long term innovation,” says Bruce Davis, co-founder of Abundance Investments.
“We hope that the deluge of new rules abates sufficiently to allow businesses to plan, invest and innovate for the benefit of customers for the long term.”
Read more: Eurocrowd launches legal report on roll-out of EU crowdfunding rules
For its part, Abundance is opting to focus on its work with public sector organisations such as local councils.
“This is a very promising area for further innovation, and alongside the long-term prospects of the new proposals for the public, offers platforms to allow larger scale investment via crowdfunding,” Davis adds.
However, others don’t see the need for innovation for the sake of innovation. Many platforms have responded to the current economic volatility by simply showcasing their ability to react quickly and deliver value for investors. Loanpad has increased its investor returns eight times over the past year, in a bid to demonstrate its agility to investors.
“Our philosophy from an investor perspective has always been to keep it as simple as possible, so in that regard we don’t see ourselves changing anything or adding any complexities,” says Louis Schwartz, founder and chief executive of Loanpad.
“We believe our investors already have as seamless an experience as is possible, which is a major focus for us.
Read more: Regulator urged to scrap ‘one size fits all’ approach
“On the borrower side we have superb origination channels to grow the portfolio so we are sticking to our tried and tested model and not looking to innovate in that area.”
P2P is an inherently innovative sector, which continuously demonstrates its ability to evolve and adapt to new market conditions. Even if its future doesn’t lie in AI or crypto lending, the sector will continue to find new ways to respond to borrower and investor demand – either at home or abroad.
