The U.K.'s peer-to-peer lending industry is small but growing rapidly as banks saddled with higher post-financial crisis capital requirements remain wary of lending, forcing smaller businesses in particular to look to alternative credit providers.
Full-year figures from the U.K.'s Peer-to-Peer Finance Association, or P2PFA, show more than £3 billion of new lending was lent through its member platforms in 2016. The trade body represents 75% of a market in the U.K., which, at its most basic, aims to use online technology to match those consumers and businesses who need to borrow — and who are being failed by the traditional banking market — with those with cash to put to work.
In the context of overall lending to small business, these figures are still modest. Bank credit to the segment was £108.5 billion in the first three quarters of 2016, according to data from the British Bankers' Association, which cited weak demand for loans as an obstacle to credit growth.
Yet, while small, P2P is expanding quickly. P2PFA data shows that cumulative lending has risen from £5.11 billion in the first quarter of 2016 — and £2.16 billion a year earlier — to stand at £7.35 billion by the end of the year. Net new lending stood at £843 million in the last quarter, up from £715 million in the first three months of the year.
These figures include both consumer and business lending, but it is the latter that has seen the greatest growth, explains Robert Pettigrew, director of the P2PFA. "Businesses are becoming increasingly aware that there are other sources of capital and other sources of finance," he said.
And smaller enterprises, which can struggle to obtain credit from banks whose higher post-crisis capital requirements make some riskier lending less profitable, are increasingly open to new varieties of funding, industry sources reckon. Fast-growing platforms are said to be more flexible when assessing credit than increasingly algorithm-driven banks and also offer relatively speedy turnaround times, sources add.
"In our day-to-day meetings we continue to hear that even though liquidity has significantly improved over the past 18 months, some banks continue to have limited appetite for SME lending, especially at the smaller end," Richard Coldwell, a director at British Business Bank Investments Ltd., pointed out. Alternative financing does not come cheap, however, with Funding Circle Ltd. offering investors an estimated average weighted rate of return of 7%, according to its website.
P2P's ability to reach small companies has not gone unnoticed by governments, with the European Investment Bank, official German development bank KfW and the British Business Bank all lending through P2P platforms. Earlier in January, for example, BBBIL, the British Business Bank's commercial arm, provided a £40 million lending commitment through Funding Circle that will be made available to small firms.
"There is a continued opportunity for [lending] growth because there is a constant demand for finance from the [small and medium-sized business] community, and a perception, rightly or wrongly, that traditional sources might not be willing to lend," added Coldwell.
Demand is just one side of the equation, however. P2PFA figures show a continued rise in the number of individual lenders from 141,321 in the first quarter to 169,747 in the last, as investors seek higher yields. "Increasingly it [P2P] is about extending access to returns," said Pettigrew.
The industry is also attracting equity capital from international investors. Funding Circle said it had secured an £82 million equity investment from international investors led by Silicon Valley VC Accel Partners earlier in January. The equity raising also saw the support of existing investors Baillie Gifford & Co., DST Global Advisors Ltd., Index Ventures, Ribbit Capital, Rocket Internet, Sands Capital Management LLC, Temasek Capital (Pte.) Ltd. and Union Square Ventures. It brought the amount raised by the U.K. business platform to £300 million since its foundation in 2010.
The growth of the industry is, however, attracting the attention of the regulator, which is concerned that larger P2P providers are evolving into something resembling asset managers. At the end of 2016, the U.K.'s Financial Conduct Authority said it saw a need to change rules, adding that it can be difficult for investors to compare crowdfunding with other asset classes and for them to assess risks and returns.
Industry sources agree there are areas where regulation could be tightened, especially in areas such as transparency. This should aid cross-platform performance comparisons — likely to become increasingly relevant once the sector's ISA offering becomes more widely available. An ISA is a U.K. government scheme that allows people to save or invest in a tax-free way up to a set amount each year.
But either way, industry sources stress this is just part of the ongoing maturing of an industry that does not fit neatly into established categories. "There has been very strong political acceptance that this is a growing sector," said Pettigrew at the P2PFA. "This is a sector that is innovating that is doesn't fit naturally into either the banking model or the asset management model."