Peer-to-peer lending in the U.K. has grown rapidly over the past decade but now faces new challenges from heightened competition and regulatory scrutiny, not to mention a looming Brexit.
S&P Global Market Intelligence estimates in the 2019 U.K. Peer-to-Peer Lending Market Report that cumulative origination volumes grew at a compound annual growth rate of 175% between the first quarter of 2005, when Zopa Ltd. launched the industry into existence, and the first quarter of 2019. Companies on our focus list, which is divided into segments based on primary lending focus — personal, small and medium enterprise, and property — originated £5.7 billion in 2018, up from £4.4 billion in 2017.
Institutional capital is increasingly fueling the growth in origination volumes. More platforms are seeking institutional capital along with retail capital as they push for greater scale. However, growth has also brought greater competition, which can negatively influence underwriting standards and pressure rates. Platform closures and weaker credit performance in recent years have brought greater scrutiny from regulators, who so far have been predominantly supportive of the industry's development. Meanwhile, Brexit threatens the industry in various ways.
To read the full 2019 U.K. Peer-to-Peer Lending Market ReportClick Here
The peer-to-peer lending model was originally intended to connect savers with borrowers via an online portal. In the U.K., the retail investor base remains a large portion of the funding base. One of the largest platforms in the country, personal loan-focused Retail Money Market Ltd., which does business as Ratesetter, continues to fund nearly all its loans with retail investor funds. However, trends in the industry point to greater involvement of institutional capital. Personal lending-focused Zopa and SME lending-focused Funding Circle Holdings PLC, the two largest platforms in the country, both derive roughly half of their funding from institutions. As platforms scale, institutional capital likely becomes more attractive both due to such investors' deeper pockets and for diversification and stability purposes.
Stability of funding will be crucial as the industry attempts to navigate growing pains, including worrisome credit performance in recent years. Expected nonperformance rates at the three largest U.K. platforms — Funding Circle, Zopa and Ratesetter — for more recent loan vintages remain elevated relative to loans originated five years ago. 2019 has seen nonperformance expectations come down, but it also saw the largest platform closure in the industry's history. Property-focused Lendy Ltd. entered administration in May after a majority of its loan book turned out to be nonperforming. Peer-to-peer lending platform BondMason Ltd voluntarily closed its core investment product, citing a weak outlook driven by factors such as greater competition and increased regulatory burden.
Shifting regulatory attitude
The Financial Conduct Authority released new regulation in 2019 that will restrict platforms' ability to market to new retail investors. Platforms will have to administer appropriateness tests to prospective investors to ensure they understand the nature of the investment. Moreover, platforms will be limited from marketing to new retail investors who do not meet certain criteria that would qualify them as sophisticated enough to invest on the platforms. These regulations will likely curtail platform growth and profitability.
The FCA has historically been highly supportive of the peer-to-peer lending industry's development. In 2014, it announced a new category of regulated activity related to peer-to-peer lending that lent greater legitimacy to the industry and business model. In 2016, the regulator launched the Innovative Finance Individual Savings Account, a tax-advantaged investment vehicle designed to house peer-to-peer loan assets. The vehicle was a boon from regulators meant to spur demand and awareness of the industry among retail investors. Though still small in comparison to more traditional ISA account types, the vehicle is seeing rapid adoption.
The recent restrictions may indicate a desire by regulators to check riskier competitive practices by lending platforms as the industry matures.
Brexit and incumbent financial institutions
Another concern for regulators is the U.K.'s impending departure from the European Union and its impact on U.K. businesses. The ambiguity around the nature of Britain's post-Brexit relationship with the EU has only exacerbated the sense of uncertainty. The peer-to-peer lending industry, while still relatively small and domestically focused, will not be immune from the impact.
Consumer confidence levels have been declining since 2016, the year of the Brexit vote. Several lending platforms have cited economic uncertainties as cause for concern. Funding Circle pointed to an "uncertain economic outlook" as a primary cause of lower loan demand on its platform. The company slashed 2019 revenue growth estimates from 40% to 20%, inciting a precipitous decline in its stock price, earlier in 2019.
While they are growing fast, peer-to-peer lenders still represent a small part of overall lending volumes. As a result, high street banks and major monetary financial institutions have not yet interfered much with the industry's activity. However, if volumes continue on their current growth trajectory, peer-to-peer lenders will become more intricately involved with the broader financial system. Whether incumbent banks will view peer-to-peer lenders more as partners or as competition remains to be seen.
Learn more about Market IntelligenceRequest Demo
2019 UK Peer-to-Peer Lending Market Report
I-Banks Raking It In On Fintech M&A
Data Science Might Explain Insurtech Startup’s Expansion Strategy