The growth of the UK market over the past 12 months has been fascinating to watch.
At Lend Academy my focus has been primarily covering the US P2P lending market but this year, with our first LendIt Europe conference (taking place November 17 in London), I have taken a much greater interest in the UK market.
When I look at the UK I see a vibrant P2P lending industry that is poised for explosive growth in the next couple of years. There are six key trends that I see driving this growth.
The inclusion of P2P lending in ISAs
The tax treatment of P2P lending has been a challenge for investors in both the UK and the US. In the United States we have Individual Retirement Accounts (IRAs) and that is the way many investors choose to invest. The inclusion of P2P lending in ISAs is going to open the floodgates for individual investors in the UK. Suddenly, savers will have a high yield alternative for their ISA money and many will choose to invest in the P2P lending platforms. This should mean a huge influx of retail investor money.
Arrival of Institutional investors
The individual investor has been the driving force so far behind the growth of P2P lending in the UK. But that is changing. This year marks the beginning of a transition where the institutional investors are recognizing the potential of this asset class. We had the launch earlier this year of Eaglewood Europe’s P2P Global Investments fund (symbol: P2P), a publicly traded closed end fund that is deploying £200 million primarily across UK and US platforms. There was a large investment by London-based alternative asset manager Arrowgrass in Zopa and some hedge funds are now getting involved. Some may bemoan the fact that we are losing the P2P aspect but I think this is a natural evolution of this asset class. Platforms are still committed to the retail investor and institutional investors allow the platforms to scale and reach profitability more quickly.
Participation of the High Street banks
Earlier this year Funding Circle announced a partnership with Santander UK where the large bank will refer SME borrowers to Funding Circle. Since then there has been talk of making this mandatory for large banks that turn down SMEs for a loan. Whether or not this new regulation is enacted I expect to see more deals like the Funding Circle/Santander deal that will drive more borrowers to the P2P lending platforms.
I have to give credit to the UK P2P lending industry for being proactive in their approach to regulation. Through the P2P Finance Association the industry has actively lobbied the UK government to enact sensible regulations of P2P lending. In April this year the FCA regulations began and all platforms must now adhere to a set of rules including minimum capital requirements, backup loan servicing and other measures designed to protect investors. Another little discussed reform is the relaxation of pension rules that gives the over-55 crowd access to their entire pension pots in retirement. Both these changes are positive moves for the industry.
Support from the British Business Bank
I think it is difficult to overstate how important the support of the British Business Bank has been for the growth of the P2P lending industry in the UK. In late 2012 the government announced it would invest £20 million in Funding Circle loans, taking a small percentage of every loan. At that stage Funding Circle was barely two years old and suddenly it had the direct support of the UK government. Earlier this year this program was expanded with another £40 million committed to Funding Circle loans. Other platforms such as Zopa, Ratesetter and MarketInvoice are also benefitting from this direct investment. By doing this, the government is not only deploying capital to these platforms but is providing the entire industry with increased credibility and awareness.
Higher yield options
The UK P2P lending industry has been dominated by the “big three” (Ratesetter, Zopa and Funding Circle) for some time. These companies all have a deep track record of positive returns to investors but the yields have been relatively low in the mid-single digits. In many ways this has been good for the industry, as the leading companies have implemented strict underwriting to protect investor money. Today, there are new higher yield options emerging with MarketInvoice offering double digit returns, Assetz Capital and LendInvest both offering high single digit returns (backed by collateral) and several newer platforms also claiming higher returns. While these higher yields often come with higher risk the fact is that investors now have a range of potential yield options.
Zopa, the originator of peer-to-peer lending, has announced that it has lent a quarter of a billion pounds in the last 12 months. Peer-to-peer lending is experiencing tripple digit growth and figures such as these only continue to highlight the success of the sector.
Here is the full press release from Zopa:
Peer-to-peer lending platform Zopa, has today announced it has lent a quarter of a billion pounds (£250m) in 12 months to UK borrowers. This also includes a record month of lending at Zopa as the platform lent £27m in October alone.
In reaching this milestone, Zopa has now lent a total of £657m with 38% (£250m) of this total being lent in the last 12 months.
Giles Andrews, Zopa’s CEO and co-founder said, “We are delighted to have lent a quarter of a billion pounds in 12 months. To put that into perspective Zopa has lent more in the last year than we had lent in seven years of lending from 2005-2012. The growth we’re experiencing is testament to our multi-award winning customer service and providing outstanding value to consumers as 97% of our customers would recommend us. The industry growth we’re seeing really goes to show that P2P lending is fast becoming a mainstream activity. Our mission is to always provide great value to our customers by making money simple and fair.”
With the inclusion of peer-to-peer lending in ISAs on the horizon, Zopa expects peer-to-peer lending to enter the mainstream in Q2 of 2015 as consumers look for better value from alternative providers by cutting out the banks.
RateSetter, who recently won the Alternative Finance Provider of the year in the AltFi awards, have rebranded themselves. They last were last rebranded back in 2012. While the new logo looks clear and integrates a percentage sign, the website has attracted varying comments on the P2P Independent Forum. There is also a poll for users to vote if they like the changes.
Old logos show below:
With the Scottish referendum several weeks away, we look at how independence could affect peer-to-peer lending between Scotland and the rest of the United Kingdom.
The vast majority of UK peer-to-peer companies are based in England, with one company - Funding Empire - based in Wales. As yet there is no major peer-to-peer lending organisation based in Scotland. Today Scottish borrowers can use peer-to-peer lending sites such as Zopa, RateSetter and Funding Circle to both lend and borrow. If Scotland were to separate from the rest of the UK, would this situation continue? Existing Scottish borrowers would still be required to repay their current loans in Sterling, and existing lenders would receive interest and capital in Sterling. However, would peer-to-peer companies allow Scottish individuals to continue to use peer-to-peer services based in the remaining UK? Would UK lenders continue to fund loans for individuals that are now outside the UK?
Bondora currently facilitate loans between UK lenders (as well as other European lenders) and European borrowers, so cross border lending does exist, but the lender assumes the currency exchange rate risk. An independent Scotland is unlikely to be able to formally use the Pound, but any Scottish currency is likely to be pegged to Sterling, so any currency exchange risk is likely to be small but probably not zero. If UK-Scottish peer-to-peer lending were to continue the costs for Scottish borrowers are likely to be higher.
Given the regulatory requirements, would UK peer-to-peer companies also want to adhere to a Scottish FCA equivalent as well as the current UK FCA? As Scotland is significantly smaller, by population, than the UK it is likely not all peer-to-peer companies would adopt Scottish regulations given the incremental costs.
It is likely we won't know exactly what will happen, but it is our belief that peer-to-peer lending in Scotland would be reduced by independence, which would be a setback to everyone in England, Wales, Scotland and Northern Ireland.