By Frank Proud
Peer-to-peer lending has continued to grow rapidly across Europe. Lenders have sought higher returns than are available from banks while borrowers have benefitted from an appetite to lend to borrower categories the banks are wary of, such as small businesses in the UK, and streamlined loan approval processes.
Peer-to-peer lenders are internet platforms which allow investors, typically individuals, to lend money directly to borrowers without having to do so via a bank or other financial institution. In the last couple of years the platforms have scaled up to meet the market opportunity, refining their propositions, improving their credit assessment and other lending processes and strengthening their management teams.
The original focus of the industry was on unsecured personal loans. However the concept has now evolved to include other variations such as loans secured on property or other assets, guarantor loans made to individuals where someone else, such as a parent with a higher credit rating, provides a guarantee of repayment, loans made to small businesses secured on the assets of the business and / or personal assets of its directors and purchase of invoices from smaller businesses.
Market size, growth and drivers
Peer-to-peer lending builds on, and lies at the intersection of important trends in the modern economy. These include the development of the technology platforms needed to support secure and robust peer-to-peer lending platforms; the increasing penetration of the internet into everyday life, which has allowed customers to get comfortable with entrusting large sums of money to an organisation represented solely by a website; the development of the collaborative or sharing economy with peer-to-peer type models emerging across many markets; widespread unpopularity of mainstream banks hence enthusiasm for an alternative and a long period with low interest rates offered to savers giving them an incentive to seek out alternative investments.
The industry lending has grown exponentially over the last few years with total lending across Europe reaching almost £1.9bn in 2014, having approximately doubled in each of the last few years.
The UK is by far the largest market, accounting for 85% of the European total. However there are also significant markets in Germany and France, and platforms are being developed and launched in most other countries.
The fundamental appeal to both lenders and consumer borrowers is getting a better rate of interest than is normally on offer from a bank. However, research shows that, for small business borrowers, access to a funding source which may lend to them when banks will not, and a quicker application process, are even more critical.
Recovering economies across Europe have enabled most platforms to reduce their loan default rates. The chart, based on data from Funding Circle’s loan book shows that, while there have been some defaults, fears that the rate of default would increase markedly in the later years of loans have not been borne out by the experience of its 2010 and 2011 loans.
As the perceived risk of the sector has reduced, rates offered to lenders have inevitably fallen. At the same time, consumer awareness has increased – by double in the last 18 months – but still remains below 50%
Some of the larger peer-to-peer platforms have started to accept government and bank or institutional finance. This allows them to speed up their rate of growth and potentially lower their cost of capital, although at the risk of weakening their differentiation from traditional finance. In the US, this has progressed further with securitisation of peer-to-peer loans to create investment bonds.
There is now a series of leading operators covering most European countries. Most of the longest-established and largest platforms, such as Zopa and RateSetter in the UK and Auxmoney and Pret d’Union in Germany / France and Bondora, based in Estonia but operating across Europe, focus on loans to consumers. But, there are also some large operators, led by Funding Circle in the UK, which focus on small businesses.
Platforms are generally lean operations with few employees. There are many variants on the core model with some platforms operating as pure marketplaces while others have evolved to resemble more structured ‘savings’-type products. Revenue models usually involve charging fees to savers and / or lenders which typically are in the region of 1-5% of the amount lent.
Continued growth appears beyond doubt, creating further opportunities for those platforms which are able to scale up and execute their plans while avoiding lending pitfalls and defaults, to maintain their reputations. Forecasts from those in the market are for peer-to-peer lending continue to grow – although rates vary dramatically with estimates for the UK market in 2018 ranging from £4bn to £30bn.
Expectations of growth are underpinned by recovery in consumer borrowing following an upturn in the economy and confidence levels; continued ability of platforms to offer better rates than conventional banks; increased awareness and customer confidence as the sector matures and is regulated and availability of more funds from access to pension and ISA investment as well as from the wholesale markets
The key risks to growth include the possibility that widespread defaults in a future downturn could shake investor confidence; a continued fall in the rates offered by platforms to lenders and a change in approach by conventional banks involving them becoming more competitive in savings and personal loans.
However, we do not believe these will prevent the growth of the industry. Platforms have learned from experience and appear to be managing risk and bad debt levels successfully. The main driver of falling rates has been the increase in the volume of funds received from savers. If funds become short, rates are likely to rise once more. Banks will find it hard to become much more competitive on rates without cannibalising their existing business. In the future, we expect to see banks increasingly working in partnership with peer-to-peer platforms, using them to provide services where they cannot do so competitively themselves.
Apex Insight’s report on the European peer-to-peer lending market includes insights from interviews with leading platforms, findings from our extensive research on published and company sources, profiles of the leading players as well as our estimates of market size and views on likely future development.
This report has been completely updated and significantly extended since the previous edition in 2013. This edition has one third more pages. Significant additions and changes include updating of market size/growth estimates and all other figures and information on a wide range of platforms from across Europe.