17 February 2016


by Bruce Packard | 17 February

A new report published by Nesta and Cambridge University suggests that P2P lending is becoming more institutionalised. An article in the FT this morning (17 Feb 2016) “Banks behind a quarter of loans on peer-to-peer websites” wrongly attributes this to banks.

Instead we are seeing increased institutionalisation of P2P from the likes of Neil Woodford, Garry Potter, Rob Burdett (F&C) and Axa’s George Luckraft. Alongside these recognised fund managers family offices, local governments and the British Business Bank fund by the UK Government have identified that SME lending and invoice discounting markets could be an attractive risk reward area. In addition P2P platforms have also aimed their marketing at IFAs, business associations (e.g. The Federation of Small Businesses) and other intermediaries (e.g. commercial brokers).

This trend is also true internationally, with many now suggesting that P2P is a misleading label, instead preferring the term “marketplace lending”. For instance, the US company Lending Club reported that in the early days 100% of the loans were backed by individual investors transacting through its website. In 2015 this has fallen to 20%, with 80% of customers either institutional investors or managed accounts.

According to the Nesta / Cambridge University report the UK online alternative finance grew 84% in 2015 to £3.2bn. While still small compared to the traditional SME and consumer banking market the high rate of growth is likely to be affecting the marginal pricing of new SME loans. This spells bad news for traditional banks with high fixed cost bases (staff, legacy technology and expensive under-used branches) competing against online platforms.

Ever since the Cruickshank report in 2000, UK banks have been subject of a number of inquiries into excess profits they make at the expense of SME customers. Following the financial crisis there was much evidence to suggest that banks were trying to claw back their losses in complex derivatives (CDOs, CPDO, CDS) and ill-judged international expansion by making high returns from UK SME customers who had little choice but to use traditional banks.

The P2P space is still highly fragmented, the report surveyed 94 alternative finance platforms. We expect the sector to exhibit a high degree of kurtosis (most platforms will fail, but the ones that go on to succeed will be highly successful). But what is clear is that life is not getting any easier for the traditional banks.

Source: 2015 UK Alternative Finance Industry Report, University of Cambridge and Nesta