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A busy year in P2P lending
The year 2013 is proving to be a monumental year for peer-to-peer lending having passed the £500million mark of loans arranged, with lots of new companies launching or looking to launch within this space. Are these companies simply jumping on the bandwagon or are they bringing anything new ?
The UK peer-to-peer market is growing in excess of 100% per annum and this is increasing, so it is inevitable that this will attract a lot of attention from new businesses. I believe that only a few companies have simply jumped on the bandwagon as most are offering something new, or targeting a niche market. It is encouraging that companies are not afraid to try something new, and while not all of these will be successful, this is a good example of Darwinian evolution in a commercial context. It is likely in ten years time that most P2P companies will operate a similar business model, or operate in a specialist sector.
There are already certain aspects that new companies are offering by default, such as the provision fund pioneered by RateSetter, guarantees pioneered by Funding Circle, or secured lending pioneered by ThinCats. Zopa, the company that started peer-to-peer lending in 2005 has over the years offered a variety of lending models, but the one that is still used, and used elsewhere within the industry is the market model where multiple lenders are automatically matched to a single borrower.
In the UK the top 4 peer-to-peer companies (by outstanding loans) have over 95% of the this market (these comprise Zopa, Funding Circle, RateSetter and ThinCats). New companies are taking some market share, but these companies have to offer something to attract lenders and borrowers. A company with lots of potential lenders and no borrowers will be as equally unsuccessful as a company with no lenders and lots of potential borrowers, so marketing has to target these types individually.
New lenders would be attracted by a higher reward to risk ratio, lower fees and whereas new borrowers would be attracted by lower interest and lower fees. Peer-to-peer lending already has market leading rates for borrowers, but not every borrower will pass the high bar for credit checks. If P2P companies relax the requirements for borrowers it can have a severe negative impact on bad debt rates months or years down the line, and several companies have experienced this with disastrous consequences for lenders and the companies themselves.
The P2P money website is unique as it is the only site to publish comparable rates between companies and bad debts, so lenders and borrowers can choose the best company for them. The one bit of advise I can offer is that all new companies should be as open and honest as possible about bad debt estimates, lates (loans that are currently late), and defaults, as they will live or die by these statistics.