11 November 2019 by Anthony Hilton
Peer to peer lending firms match lenders with borrowers, but is the practice decreasing in popularity?
I used to be a fan of peer to peer (P2P) lending. People with money would lend to individuals and companies, though a website organised by the peer to peer company.
The idea was that individuals could get much more interest than they would by putting their cash in a bank. Lenders who would probably not get a bank loan anyway because they did not have a track record or would find it hugely expensive, it was thought, would willingly use a peer to peer facility.
It seemed to go swimmingly, particularly in the months and years after the financial crisis when the banks had their own problems and drew in their lending horns.
Almost 100 P2P companies launched, thinking that they could use technology to create their platform and to monitor lenders so they did not go bust.
It helped, too, seeing the billion dollar market caps of technology companies in the US whom they thought they could emulate.
Initially, lenders got their money back at mouth-watering rates of interest. But in spite of the hype and excitement, most P2P companies did not make any profits then, and almost ten years on, they are not making money now.
The biggest of these is Funding Circle. Its CEO Samir Desai was expansion-minded, and in September last year he floated the company at 440p which valued it at £1.5 billion. But his losses also expanded, partly because he wanted the cash to embark on further growth. But then he told investors that life was getting tougher.
The share price told the same story. In October this year the shares touched 92p, which is not far short of 20% of the float price.
Another was Zopa, the first P2P lender in fact. After ten years of providing consumer loans – £500 for a mobile phone, £2000 for a caravan, £5000 for a child’s wedding – it decided to apply for a banking licence.
On one level it becoming a bank, after trying for years to put them out of business, was like the pigs standing on their hind legs to become human as in George Orwell’s satire Animal Farm. But it was also a reality.
People say you need £500 million of consumer loans and seamless technology to make money. Zopa in its old form did not come anywhere near that.
Conrad Ford, who recently resigned from his creation, Funding Options, says it is indeed hard to make money. Balance sheet lending can make a good margin but it is expensive if you are to minimise the risk. In contrast, a broker, like Funding Options, is much simpler, but makes much smaller margins.
Peer to peer firms are often neither one thing nor the other.
Getting good borrowers requires ever greater technology which many cannot afford, and anyway, they make a point of being a low margin business.
Angus Dent, CEO of Arch Over, is hanging in there, but he too thinks it is tough, and Brexit has not helped. He does not like consumer loans because you cannot get scale, so he looks for companies who can borrow £100,000, though these days he would prefer them to borrow £250,000 – fewer companies but bigger. He gets a better return and the numbers are more reliable.
But many are marking time, wondering what might happen with the EU. Potential borrowers are reluctant to expand; potential savers are reluctant to part with their cash.
As a result business is smaller than last year and is very volatile. Profitability may come next year rather than this. But at least he has a parent company which is supportive.
He is also wary of property which is very illiquid. Lendy, which went bust this summer was heavily into property and also took institutional money which it then had to deploy – leading to bad lending decisions. Lenders will be lucky to get half their money back.
Dent says there is also a contradiction in the business model. If growth companies cannot get funds from the banks then they will indeed look to him. But if he lends to them for three years and they do indeed grow, then that gives them access to the banks, so they leave.
If on the other hand they do not grow over three years then he may not want them either, because they have not got a business and are potentially vulnerable in a downturn.
He thinks there is a business, but it is low margin and slow – and not at all what was expected ten years ago. Blanks rather than silver bullets are what many P2P lenders have in their locker.