Bill Blain, a strategist at Mint Partners, says Yes.
Lending Club is a long expected smell-the-coffee moment for the sector. The firm sold loans to an investor that did not conform to its instructions, highlighting multiple regulatory risks. The sector is vulnerable to bad news, exacerbating the slow growth and overspending problems many platforms face. It’s also a wake-up call to investors who convinced themselves that putting money into platforms was somehow akin to opening a bank account. No. They are about risk. Lending to the SME sector is high risk – small companies go bust and fail with monotonous regularity. As collateralised loan obligations and credit default swaps proved eight years ago, and platforms are likely to show now, “diversified” lending to corporates is lumpy risk. The consumer lending platforms may do better. Consumer loans are more diverse, granular and when a number of borrowers default, there are enough others paying to keep up investor returns. However, investors should be very aware that consumer lending platforms are essentially gaming the same approach as subprime lending before the crash.
Rupert Taylor, chief executive and co-founder of AltFi, says No.
The failures at Lending Club justified robust action because they related to a discipline that is central to what distinguishes P2P from conventional finance – namely, disclosure. This underlines how critical transparency is to the model but does not reveal a structural problem. In its purest form, finance is the process of matching excess capital that seeks a return with those that are prepared to pay for the use of that capital. The internet remains a superior conduit for matching these requirements, given the associated reduction in cost and its convenience as a medium for sourcing data that can inform the pricing of risk. But full and transparent disclosure is critical as it ensures alignment between the lender (the principal) and the platform (the agent). The UK is blessed with industry-leading standards of transparency. However, more can be done, on both sides of the Atlantic, to ensure that buyers of loans are provided with sufficient information to allow for the enlightened appraisal of risk.