You'd be forgiven for thinking, following last week’s news that Lending Club’s chief executive Renaud Laplanche was stepping down amid allegations around loan sales and misconduct, that this is the end of P2P lending as we know it.
Commentators have been quick to discredit the P2P sector, with online lenders labelled “banks in disguise”, up to the same old tricks as the incumbents they seek to disrupt.
But if one car has an accident, it doesn’t mean we all go back to the horse and cart. The coach makers might cry out to ban the car, but driving is still a faster, more secure way of getting around. The same is true of finance – borrowers don’t want to go back to the banks. Online lenders have already changed how people and businesses access money.
P2P platforms have used technology to bring better, faster finance to consumers and businesses across the world. By cutting out the middleman, they’ve enabled investors to tap into new asset classes that were previously inaccessible to them.
Online platforms have removed layers of legacy costs that come from maintaining the outdated infrastructure of local branches and call centres. These efficiency savings are passed onto customers.
Here in the UK, P2P is shaking up an oligopolistic market controlled by a handful of banks. Consumers and businesses have been given a wealth of new, competitive sources of funding – this must be a good thing.
When it comes to ensuring what happened across the pond doesn’t occur here, transparency is key. For starters, it’s important to remember that the US market is very different to our own in the UK. Different platforms finance themselves in different ways, and in the US, the largest players have embraced institutional investment and securitisation as a way of obtaining cheap funding to turbo-charge their growth.
Here in Britain, most platforms talk consistently about having a diverse funding base, mixing more retail, high-net-worth capital with institutional funding. Keeping this healthy mix is essential. While it may mean slower growth in the short term, having a diverse source of funding puts platforms in good stead for the future.
Of course, some platforms do it better than others. The P2P Finance Association ensures that all members commit to data transparency. Loan books allow anyone to analyse each and every transaction, but ultimately it creates accountability. Bad loans, high loss rates – they’re uncovered fast. Think how much money was poured into under-performing banks, before we finally realised that you can’t keep propping bad loans up with taxpayers’ money.
Regulation also differs across the pond. The UK government and the Financial Conduct Authority have remained very close to the online finance movement, with a dedicated regulatory regime which oversees P2P platforms. There is a high level of communication between policy-makers and entrepreneurs, which fosters long-term thinking, as opposed to knee-jerk reactions.
Having said all this, the events of the past week do make it an opportune moment to pause for thought and think about how the P2P market will evolve over the next few years.
Up until now, fintech has always been viewed as more of a tech play – venture investors expect tech levels of growth. But it’s not always healthy for financial businesses to grow in this manner. This isn’t a taxi or a meal – this is someone’s savings, or their business finance.
Given the stakes in P2P lending and the need to originate investments that will perform through the economic cycle, it might well make sense for marketplace lenders to move more slowly but invest in operations. Platforms must develop more robust protection to the types of risk they face (like fraud and loss rates).
Within P2P there is a trade-off between growth and risk, and in the long run, the players who respect the discipline of prudent risk management will be the real winners. This sustainable approach will protect the sector for the future – and help ensure customers aren’t sent back to the dark ages.