UK P2P Lending market: a review of 2016 (and 3 predictions for 2017)
We’ll also go back and look at our predictions from last year and see how they panned out
BondMason helps retail and institutional investors gain access to high quality direct loans handpicked from approved platforms. Sitting across the platforms and industry gives us a unique vantage point to talk about the P2P lending market as a whole. As we approach the end of the year and start thinking about plans for the next, we thought we’d share our observations on the current state of play.
P2P lending continued to expand in the UK in 2016, with lending growing to £3.2bn, up 39% from £2.3bn in 2015. Whilst the larger platforms saw their growth rates slow a little, up 32% year on year, they still added an impressive £568M of lending in 2016. Meanwhile the next 20 medium-sized platforms continued their strong growth, growing by 70% collectively and adding £316M of lending in 2016.
BondMason Research 2016
Rather than simply being disruptive, there are healthy signs that P2P Lending is maturing and moving into the mainstream with boundaries blurring amongst what constitutes a “P2P Lending” platform and what doesn’t. Further up the chain of capital supply, these platforms are becoming integrated into traditional pools of capital and operating naturally within the multi-layered and multi-faceted lending and credit markets. This trend is driven by the need for larger platforms to satisfy the growth in their loan books, while institutions are becoming increasingly comfortable with the space, as they see attractive yield and good risk-adjusted returns. We expect this dynamic to continue in 2017.
Blurring the boundaries – direct lending is the new P2P (which was the new direct lending)
There are further signs that P2P Lending is moving out of adolescence and into maturity: Zopa seeking a banking license, a couple of securitisations, and further inter-relationships between P2P platforms and institutional investors leading the way. In 2016, institutions became the largest source of capital for P2P lending in the UK for the first time.
2016 saw the definition of “what is a P2P lending platform” became increasingly blurred. Historically it’s been clear: a private lender connects with a private borrower. Of course, the borrower side of the table has been expanding for some time – Funding Circle lending to SMEs and LendInvest lending to Property are obvious examples. Now we are seeing new participants, typically backed by a family-office or single institution who aren’t opening to smaller private lenders, but defining themselves as participants operating in this ever-expanding P2P lending industry.
Whilst these new participants may not be strictly P2P lending platforms – and only a few may need to apply for the relevant permission from the FCA – it is all part of the movement toward more and more direct lending. Bringing the lender and borrower closer together – theoretically enabling the lender to access greater returns, whilst accepting a higher level of risk and exposure to loan defaults.
For comparison, we’ve not included these operators in the analysis. However, they collectively account for as much as a further £500M of annual direct lending.
Three predictions for 2017
- A bank will enter P2P at the sharp end: in 2016 we have already seen some collaborations (Zopa and Metrobank for example), however, we predict that a bank will go one step further in 2017, either through an acquisition, or on their own, and create a seamless link between a traditional bank and a P2P proposition. Probably aimed at deposit holders being able to take more risk and more yield (rather than a differentiated proposition for borrowers). We’ve already seen fund managers such as Montello (LendInvest) and Octopus do this, and the power of a bank’s deposit taking capabilities will enable further new products to emerge for investors and lenders.
- A notable platform failure: LendingClub hit the headlines in 2016, through the combination of weak governance and a CEO without a real financial background leading to sub-optimal behaviour. We think a significant platform may hit the buffers in 2017 as their growth begins to slow. Increased market competition will expose any weaker foundations. Additionally, whilst not headline news, we expect to see a few platforms put the brakes on and slow up.
- Rates will continue to drop: as interest rates continue at a low level, and P2P lending continues to become more mainstream, more yield hunters will move into the space, providing a further source of capital and putting downward pressure on rates.
So, overall, the big picture is that whilst the industry is growing and delivering attractive returns, lenders need to remain vigilant and conduct healthy due diligence on the P2P Platforms as well as the loans themselves.
...and how did we do with our predictions for 2016?
You may be thinking ‘it’s all very easy to sit there make predictions’ but how good were BondMason’s predictions last year?
This time last year (Dec 2015) we made three predictions for 2016. So how did we do?
- Market growth will slow, but another £1.0-£1.5bn will be added: it looks like we got this one right pretty much on the button, with £0.9bn added in 2016.
- Platform consolidation and exits will increase: we may have been a bit early on this one. We have seen some platforms struggle in 2016, and only a couple exit. But meaningful consolidations haven’t happened – with the exception of FundingCircle’s tie-up with Bondora - as platforms chose to continue to plough their own furrow. We carry the prediction of consolidation and cooperation forward into 2017.
- The IF ISA will attract more investors but will be slow to take-off: it looks like we got this one right too. Albeit driven by the slower rate of FCA Full Authorisations, rather than a lack of investor appetite.