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Big players best placed as P2P grows up

personal loan
By David Bell
11 Oct 2016

With pioneers of peer-to-peer lending tapping more institutional investors and competing to claim how boring their products are, the hype in alternative lending may be fading. That's good news, but only for those that have already reached scale.

For a market known as a fountain of tech-style hype marketing and overblown announcements, the LendIt conference held in London on Monday and Tuesday this week was noticeably flat.

With a couple of exceptions — the platform promising 12% returns “for certain” and one service declaring it “eats risk for breakfast” — the tone of the bigger lending platforms was reserved and serious, as were the attendees.

While it is not entirely fair to draw conclusions from the atmosphere of a single conference to the entire market, the sombre vibe of the Intercontinental hotel in Greenwich chimed with notes struck by the leading proponents of the market in recent months.

Commonly heard buzzwords and phrases from some of the bigger platforms, which are increasingly tapping institutional funds, now see them refer to their product offerings as “nothing new”, or “boring”, stressing the similarity of their underwriting processes to banks, while extolling the virtues of their improved technology offerings.

It is a far cry from the hype which has often surrounded the sector.

A new, dull normality?

An analyst from one of the main platforms remarked in the exhibit hall that the strangely quiet atmosphere was possibly a “new normal”, with the major platforms avoiding hyperbole and emphasising their sustainability, rather than the headline rate of their growth level.

Two main factors are at work behind this trend. They both bode well for the most sophisticated and prudent platforms.

The first is that major marketplace lending players are looking to boost the volume of institutional investment in their loans, in order to scale up origination. 

Whether that comes from unlevered funds taking direct exposure to the loans, listed funds with leverage or through securitization deals, institutional investors in the fixed income sector would rather hear about prudent credit underwriting and the similarity with the more familiar banking sector than radical new features, or slick app interfaces.

Secondly, the Financial Conduct Authority is in the process of completing its review of the crowdfunding and peer-to-peer sector, which began in September this year. The FCA introduced a framework for the regulation of these online platforms in 2014 — the first global jurisdiction to have a dedicated set of regulations for the peer-to-peer industry.

As part of the review, eligible platforms are vying for FCA approval, with the first approvals expected by the end of the year. That will enable them to launch Innovative Finance ISAs, allowing private individuals to invest their savings into P2P loans, for tax free interest income.

The expectation is that each individual will only be able to open one Innovative ISA with a single platform. With all platforms vying for essentially the same pocket of customers, there is a huge first mover advantage, which will only reinforce the dominance of leading firms.

Maturity mismatch

So, is the relatively sombre tone struck by the major platforms simply a case of window dressing, while the eye of the regulator is firmly on the market?

Hardly. What it does highlight though is the huge disparity in the maturity of firms in the market, between the early pioneers that are now becoming ever more entwined with traditional finance infrastructure, and those on the fringe, that continue to market themselves as disruptors.

It is the biggest players in the market — the likes of Zopa, Funding Circle and Ratesetter — that will be well placed to prosper under a new, more heavily scrutinised market.

Smaller, newer firms, bringing more radical or racy products to try and break into the market, might already be too late to the party. Those trying to break in now might want to think about changing the breakfast menu and readying themselves for consolidation.

By David Bell
11 Oct 2016