The road was slightly bumpy for alternative lenders last year. Authorisations for the Innovative Finance Isa were delayed, there was further Financial Conduct Authority (FCA) probing, disappointing results hounded a good handful of the UK’s largest platforms and Goldman Sachs made its foray into the market with in-house platform Marcus.
But provided the regulator continues with approvals and doesn’t come down too censoriously, growth out-paces spend (or new funds are raised), and relations with banks tending towards the co-operative rather than becoming a race to the bottom, 2017 could well be the year alternative lending becomes, well, normal.
Here are the predictions of the UK’s top platform founders and chief executives.
Chief executive of Zopa
More competition and a growing slice of the market
This year will be a landmark one for consumers both in terms of choice and value. The current competition among loan providers will intensify this year, making it even more important for customers to compare all alternatives, rather than assume that their bank might be the best value for them.
Inspired to shop around by lower prices, once consumers see what is available, we expect alternative finance providers to have the edge over traditional banks.
Without the shackles of legacy technology, alternative finance providers are more nimble than larger financial services business, which means they can provide consumers with a better experience, and offer better value.
Speed of adaptation to consumer habits will be key, particularly leveraging mobile experiences and big data. Alternative finance providers, which can offer transparent and easy-to-understand products that are tailored to suit customer needs and the ability to seamlessly access financial products from anywhere via mobile, will take a larger slice of the market this year.
Co-founder and chief executive of LendInvest
Balanced markets and AI
In 2016, we all learnt not to trust predictions. But we can look instead at what we learnt last year to see where better to focus time and efforts in the months ahead.
A focus for lenders – alternative and traditional alike – will be on deal flow; more specifically, ensuring a consistently high volume of creditworthy borrowers. It doesn’t take an economics expert to see that, when a market dips, the appetite of borrowers to take credit risk can follow suit.
If Brexit continues to spread uncertainty, that’s something we could hypothetically see. Maintaining a healthy equilibrium where the supply of capital does not outweigh the demand for it will be critical for alternative lenders. It’s a key tenet to our cost-effective alternative business models.
I’m also intrigued by what the year holds for AI and machine learning in the alternative lending space.
In the property finance world in particular, we’re seeing more of these applications come to light and brimming with potential to reshape the process of underwriting, increase efficiency, as well as redefine how businesses protect themselves and customers against fraud. In my view, they’re infinitely better suited to applying themselves to alternative lenders than the more traditional ones out there.
Co-founder and chief operating officer at RateSetter
Inflation and risk
The last quarter of 2016 saw inflation running at its highest rate in two years. As people start to feel the effects of this, we’re going to see a growing number of savings accounts become “zombie accounts” which offer returns below the rate of inflation.
People will be faced with the prospect of seeing their hard-earned savings slowly but surely decrease in value. We’re already in a situation where no easy-access savings accounts can beat inflation – and that’s with CPI currently at 1.2 per cent, well below the Bank of England’s 2 per cent target.
One thing is for certain: savers will not gain anything by simply burying their heads in the sand. I expect that this will prompt more people to consider putting their money to work – and a good number of them will decide to take on some risk in exchange for healthier returns by investing in peer-to-peer lending.
Co-founder and UK managing director of Funding Circle
The year of the retail investor
Direct lending platforms only exist because of the huge value they create for customers on both sides; improving on an already best-in-class customer experience will therefore be critical in 2017. Platforms have already proven their viability over the past six years, but the winners will be those who have a relentless focus on delivering value to customers, including the delivery of attractive and stable returns. Our current estimated return is 7.1 per cent after all fees and bad debts.
By the end of 2016, globally, Funding Circle alone had more than 60,000 retail investors on the platform with 24,000 businesses having borrowed, helping to create an estimated 50,000 new jobs. We only expect this demand to grow through 2017 as awareness increases and investors come to us for new products, great experience and better returns.
For small businesses, the industry is offering a faster, more personalised and more efficient borrowing process. Contrary to the belief that Brexit may lead to tightened credit availability, we’re continuously providing greater choice for small businesses while boosting the economy. Last week, the British Business Bank committed to inject a further £40m into small businesses through Funding Circle.