After a decade of bold leaps, 2016 is the year that peer-to-peer (P2P) lending will finally come of age. It has built a loyal following of investors, but remains something of a niche asset class. This year it will launch itself as a true mainstream investment option. Why?
The Innovative Finance Isa
In the 2015 Budget, the chancellor set out plans to make holding P2P loans in an Isa a reality from April this year – injecting new money into the sector, and finally cementing a place for P2P lending, including debt-based crowdfunding, alongside other mainstream investments in the government’s flagship investment product.
Roughly 7 per cent of everyday investors are already using P2P platforms, but the suggestions are that this number will grow rapidly once the new Innovative Finance Isa becomes available. Our own research suggests that as many as 40 per cent of everyday investors would consider investing in P2P lending when the Innovative Finance Isa launches.
While this new Isa will certainly introduce P2P lending to a wider audience, this will come with greater responsibilities for the sector and a growing requirement for providers to educate prospective investors about the unique combination of risks and rewards associated with this asset class. And the launch will not necessarily be straightforward. The FCA is yet to complete the accreditation of P2P platforms, and this may take many months. Since all platforms will not be accredited at the same time, this could give some players a major marketing advantage.
Bringing P2P lending even further into the mainstream, new entrants such as Hargreaves Lansdown are looking to launch their own offering this year. Combined with the advent of the Innovative Finance Isa, this will force many independent financial advisers to start taking P2P lending seriously as an asset for their clients for the first time. One of the obstacles preventing many financial advisers from suggesting P2P lending to their clients is its FCA classification as a “non-standard” investment. But as it’s brought into the mainstream, it will be given a more mainstream investment label and financial advisers will feel more confident about P2P.
Another key development this year will be institutional investors launching into the P2P lending space, seeking opportunities to lend to UK SMEs – a move which could single-handedly double the money deployed on platforms by 2017. Although this is positive on the whole, there are some dangers. If some of the larger platforms start to lose interest in smaller investors who want to make their own investment decisions, large institutional investors could begin to dominate. These platforms will be easy to spot because they’ll stop using the traditional P2P auction process and start describing themselves as “marketplace lenders” rather than P2P lenders.
The rapid increase in the funds being deployed will also drive down interest rates and result in those platforms with good deal flow accelerating ahead of those where deal flow is restricted. This will cause a significant change to the relative rates of growth of the different platforms and may put pressure on some platforms to lower their standards.
In terms of other trends, some platforms may also start to reveal a steady increase in default rates, particularly where high growth rates start to slow down and earlier losses are no longer swamped by the rapidly-accelerating volume of new loans.
For smaller platforms, the risk is that they might well fade away without being noticed, but it’s unlikely that we’ll see many failures because larger platforms can achieve faster organic growth by absorbing smaller platforms. The only practical way for new entrants to get into the market over the next 18 months will be to buy into an existing regulated platform, fast-tracking the regulatory process. As such, the market value of smaller platforms will not be related to their loan book, but will be based on their software and the intrinsic value of their FCA regulation. This also suggests that no platform is likely to fail unless there is a fraud, a software catastrophe or the platform fails to achieve full FCA accreditation.
Focus on property
Property based P2P platforms will also continue to grow rapidly until there is a correction in the property market – something made all the more possible by recent policy changes to buy-to-let landlords – and this will cause some disruption as investors begin to analyse the role of property in their portfolios.
This year will without a doubt be an important one for P2P lending. But as platforms grow, the temptations for greater intermediation and institutional investment will also increase. The market will continue to innovate and evolve. At ThinCats, for example, we are looking at how we can preserve and expand the base of the investors who made us what we are today, while also staying true to our roots and trying to attract new institutional investors. The industry must follow suit in maintaining its credibility while capitalising on the benefits of mainstream investment.