FEW NEED telling about the growth of peer-to-peer lending. Whether driven away by dissatisfaction with traditional banking, or pulled by attractive returns and convenience, lenders and borrowers are increasing interested. According to Nesta, P2P business lending grew by 211 per cent between 2012 and 2013. And while P2P lenders control just 1 per cent (about £250m) of the UK personal loan market, the Open Data Institute expects this to increase to £1bn by 2016.
There are other changes afoot. From April, the FCA will regulate P2P – greeted warmly by some in the industry as a sign of legitimacy, while others worry about being strangled at birth. Financial technology (fintech), the sector in which many of these emerging services have been slotted, is also blossoming. According to a DueDil analysis of the FinTech 50 (a list of the most disruptive brands in fintech), the combined turnover of the UK firms is about £408m (albeit dominated by Wonga’s £309m). Those companies that file accounts also have £274m in net worth. They are not the fly-by-nights of popular imagination, but industry builders. Alex McCracken of Silicon Valley Bank says the UK attracted $3bn of the $11bn invested in fintech globally in 2012.
Nick Harding of P2P newcomer Lending Works thinks London has the perfect environment for fintech. “It’s a recipe made in heaven”: people hungry to grow businesses, global IT talent, a large financial sector, and demand outstripping supply for new personal finance products. Before generating any revenue, he raised an impressive £3.5m in investment. Is this irrational exuberance? Not so, says Harding. “Our investors weren’t looking to invest in just anything.” Most venture funds wouldn’t commit to the idea until it had made money, but individuals (including David Kyte, founder trader of LIFFE) took a punt.
So why was Lending Works so successful in its seed round? Essential in a market bristling with competition, says Harding, was a unique selling point. His was the Lending Works Shield – an insurance policy that protects lenders’ money against default. Sitting on top of a reserve fund and a ring-fenced trust, he says that the additional cost to customers is “negligible”. But his investors liked the Shield as a key differentiator – and as way of tackling concerns that P2P is excessively risky.
It wasn’t a short process. Harding, formerly of RBS, first developed his business plan in December 2012 and secured a small angel investment in March 2013. From May, he faced the unenviable task of building out his product, negotiating the Shield insurance, and scouting for further investment. Lending Works didn’t launch until January this year. But he credits those gruelling months with improving his investment search. “It made us even better equipped to pick our investors carefully – not only were they able to support us financially, but they were going to be the right people to back us with experience, insight, contacts, networks and so on.”
One unknown quantity is what this means for traditional finance. Harding says he has no plans to partner with a bank (for investment or otherwise), implying a moral basis to the competition he offers. But elsewhere in fintech the relationship is more symbiotic. The mobile payment service Pingit, one of the Fintech 50, was founded in 2012 and was initially only available to Barclays customers. Tradable allows third-party developers to offer apps via its open trading platform, and partners with established brokers like Monex Capital and Forex.com.
George Rogers of Techstars thinks the relationship between fintech startup and incumbent is different to other industries due to regulation. But even as fintech matures as an industry, its component parts show little sign of slowing down. There may be many more Wongas to come.
Tom Welsh is business features editor at City A.M. @TWWelsh