BondMason is out with their DIrect Lending Report that indicates that between 2016-2017, mid-sized online lending platforms increased their potential to compete, growing their market share by approximately 50% to £1.6 billion. Large platforms, meanwhile, grew their share by only approximately 6%. BondMason stated the “Big Four [are] challenged by mid-sized platforms as ‘flight to quality’ hots up.”

BondMason offers pre-selected loans from its UK network through a single portal, helping investors to navigate the marketplace and making it simple to build a lending portfolio.

According to BondMason’s Direct Lending Report 2018, increased competition is being matched with overall market growth. Nearly 80% of platforms now offer a credit risk team, while underperforming platforms continue to exit the market.

“We predicted a ‘flight to quality’ would start to emerge in our Direct Lending Report last year, but it’s only in the last twelve months that we’ve really started to see an up-tick in platforms’ governance standards, and some of the weaker platforms struggle with their loan books,” said Stephen Findlay CEO of BondMason. “Our concern a year ago was that many platforms didn’t have sufficient credit risk teams or experienced investment professionals in place.”

BondMason states that the Direct Lending market facilitated £4.5 billion in 2017, up 21% from 2016, as investors continued to turn to alternative finance, frustrated by poor returns caused by volatile stock markets, rising inflation and underwhelming ‘go-to’ investment products. Meanwhile, wealth managers and the IFA industry views the market cautiously.

“A survey featured in our report shows that the majority of advisers can see the benefits of Direct Lending. In fact, there is a lot of potential for advisers to grow the market further as it is still very small in the context of overall lending,” added Findlay. “However, many advisers are reluctant to embrace a new investment product. Years of scandals around unsuitable investments have left advisers battle weary. We’ve already seen a number of compensation claims just in 2018 from the FSCS around non-standard investments; and appreciate the need for advisers to remain cautious.”

The IFISA product is gaining traction as more platforms are offering these products. Findlay expects this to continue to grow in 2018 as demand from retail investors increases and more retail gatekeepers, seek a better return on their client’s cash balances.

BondMason’s report also shows that loan pricing is increasingly the main driver behind a platform choice – having an impact on investors returns.

“We believe this is likely to lead to a continued reduction in loan rates in 2018, and a reduction in expected rates of returns for lenders, due to platforms competing for borrowers on price. Some platforms may actually exit the market as it becomes harder for platforms to sustain revenues to cover their cost base,” shared Findley. “We believe that investing in lending will continue to grow as a viable and attractive asset class, to compliment holdings in cash and stocks & shares.”

Looking ahead, BondMason anticipates increasing collaborations between traditional lenders and the online lending industry. 2017 saw partnerships between Metro Bank and Zopa, RBS and Funding Circle, and Santander and Kabbage, and this trend is expected to continue, and accelerate, throughout 2018 and 2019. Consolidation between Direct Lending platforms will occur later down the line. Banks are likely to continue to deploy capital through these lending platforms, but also start using online lending as a source of capital. Platforms are expected to compliment, not disrupt, wholesale balance sheet finance and depositors.

“There is still so much potential for the direct lending market – potential which the banks and large institutions are increasingly recognising,” commented Findley. “We believe the range of investors and the methods of investing will diversify in the coming year and competition and consolidation will continue to produce better products, which will improve regulation standards. Direct Lending is proving itself to be an asset class here for the long-haul and we expect it to mature and change form over the coming years – becoming an increasing component of asset allocations for retail and institutional investors.”

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