Peer-to-peer lending: Model takes off worldwide
BY SHARLENE GOFF
The Financial Times
PUBLISHED 14TH JUNE 2012
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Peer-to-peer platforms, which enable individuals to provide loans directly to each other as well as to small businesses, are becoming increasingly popular in a number of countries across the world, including the US, Germany, China and the UK.
P2P lending was recently placed firmly on the US agenda after John Mack, the former Morgan Stanley chairman and chief executive, revealed he was joining the board of the Lending Club, a six-year old P2P lender. Together the Lending Club and Prosper, another US P2P group, have lent about $1bn in the past six years.
Meanwhile the model is also taking off in China, where large numbers of websites have sprung up as alternative lenders for consumers and small businesses that are deemed too risky by the country’s banks. The dynamics of the Chinese market – which has millions of micro-entrepreneurs and as many as 200m rural poor who may not be able to access finance from traditional sources – make it a huge opportunity for P2P groups.
In the UK, the coalition government’s spring brought unexpectedly good news for P2P platforms, which were told they would qualify for up to £100m of government investment as part of efforts to boost the UK’s anaemic credit supply.
The move brought into the mainstream a new breed of lenders that, despite rapid growth in recent years, provide just a small fraction of overall UK loans.
P2P groups started to appear in the UK in the mid-2000s, offering a way for savers to earn higher interest rates by lending their money to other people rather than stashing it away in a bank account.
They have benefited from increased demand during the financial crisis as banks have withdrawn credit lines in an attempt to shrink their balance sheets and bolster their defences against another downturn.
Many have been growing at double-digit rates in the past few years and say their loan books have expanded even faster in recent months.
The handful of P2P sites – including Zopa and RateSetter, which offer personal loans and Funding Circle, ThinCats and Market Invoice, which specialise in supplying funds to businesses – are expected to provide up to about £200m of loans this year.
The attraction for lenders is that, because P2P sites have slimmer margins than the big high street banks, they can provide higher returns.
People who provide loans, who range from students and pensioners to wealthy family trusts and City traders, can obtain pre-tax yields of up to 10 per cent, although once defaults are factored in this would be lower.
Meanwhile borrowers – either consumers or small businesses – may find they can obtain loans more easily, quickly and potentially cheaply than they could through traditional lenders.
The question is whether P2P lenders are here to stay – or would an improvement in credit supply from banks jeopardise their ability to continue to grow their share of the market?
Clearly the groups believe they can continue to offer a sustainable alternative to bank lending. They say certain challenges facing the banks – meeting tougher requirements on capital, for example, and a move towards greater transparency over charges – will mean they will never return to the kind of unchecked and unprofitable lending they did before the crisis.
Also, there is a strong determination within government and regulatory circles to improve competition, particularly for SMEs to counter the sharp fall in lending to these borrowers.
“The UK SME lending market is incredibly concentrated – more than any other in the world,” says Samir Desai, co-founder and chief executive of Funding Circle, the largest P2P site for SME loans. “In the UK around 90 per cent of SME lending is in the hands of four banks. In the US there are thousands of regional banks, while in Germany, France, even in China there is more choice.”
Funding Circle, which has applied for a portion of the £100m of government funds earmarked for alternative finance providers, is lending more than £1m a week on its platform, which it says is four or five times as much as a year ago. The company recently raised £10m to fund further growth and hopes to be lending £10m a month by the end of this year.
Also there some business areas that banks are pulling back from, which P2P groups are keen to fill. One example, according to Market Invoice, which enables investors to settle bills for companies ahead of their payment date, is export invoices.
“Around 30 per cent of UK SMEs are trading with large foreign corporations but banks typically only want to deal with UK invoices,” says Anil Stocker, co-founder of Market Invoice.
But with any largely untested form of lending, there are a number of challenges to overcome.
One is consumer protection. Some experts are afraid that people who lend on P2P sites may not fully understand the risks they are taking on.
While there have been few horror stories – apart from the collapse of social lending site Quakle amid reports of a 100 per cent default rate, missed loan repayments have so far been low – there are some concerns that lenders may not be aware they could lose their funds.
Money deposited in P2P sites is not protected by the UK’s Financial Services Compensation Scheme, so any losses have to be borne by individual lenders. Meanwhile these lenders are regulated by the Office of Fair Trading, not by the Financial Services Authority.
Another obstacle is building awareness. The mention in the Budget speech was helpful to P2P groups but they remain niche. The Federation of Small Businesses, the industry’s lobby group, says that only a small proportion of its members are aware of P2P lenders.
Some are planning to launch marketing campaigns later this year to build their reputations.
The danger then is that as more people become aware of the returns offered by these groups, they flood into them without taking notice of the risks.
“The market isn’t regulated and there are no guarantees that those who lend will get their money back,” says Adam Scorer, director of policy and external affairs at Consumer Focus. “Consumers and lenders need to be made fully aware of the pitfalls so that they go in with their eyes open, particularly as this form of credit becomes more mainstream and attracts more users.”