The rise of peer-to-peer lending

Innovative collaborations and customer focus will drive continued growth in this young industry. Inês Maia looks to the future

Over the last 15 years, peer-to-peer (P2P) lending has enjoyed a meteoric rise. In the wake of the financial crash of the late 2000s, it has firmly established itself in the mainstream of financial services.

The concept is a simple one: those looking to make a return on an investment lend their money directly to consumers or businesses seeking a loan. It effectively cuts out the middleman, such as a bank, which creates a significant efficiency. This translates into favourable yields – often of 5-10% – for the investor, and competitive loan rates for the borrower. The platform simply acts as a facilitator in the transaction.

In 2018, the sector’s total lending volume topped £6 billion in the UK alone, a growth of 20% on the year before. More than £16 billion in loans has been facilitated by P2P platforms in the UK, and every indicator suggests that this is set to continue growing exponentially. Unsurprisingly, mainstream banks are starting to sit up and take notice. But how has this relatively young industry enjoyed such rapid growth – and what lies in store for the future?

The rise of P2P

P2P lending in its current form was born in 2005, when the first platform of its kind opened for business in the UK. It was initially something of a niche product: only in the years after the financial crash of 2007-2008 did an increasing number of platforms enter the fray. The credit crunch, coupled with the diminished reputation of banks and other traditional lenders, left a vacuum for a more consumer-friendly form of finance.

Thanks to its combination of an efficient business model, a simple customer journey, and a high degree of innovation, P2P lending has filled the void. It now caters for a range of lending and investment opportunities, including consumer loans, business loans, invoice finance, property lending, retail finance, and more.

The sector has shown a unique willingness to embrace regulation. Rather than viewing regulation as a straitjacket on growth, platforms have taken a long-term view and recognized that regulation further legitimizes the industry in the eyes of consumers and investors. With that mindset, the industry has also developed self-regulating structures. In the UK, not only is P2P fully regulated by the Financial Conduct Authority, but platforms have founded the Peer-to-Peer Finance Association: its members must adhere to a strict set of operating principles.

Are challengers replacing traditional finance providers?

Investment and high-street banks have been around for centuries and are clearly still the dominant force among financial services providers. But challengers have made significant strides in closing the gap. They have been more agile in capitalizing on market trends, and faster to integrate new technologies.

The result is that today’s borrowers can be robustly credit checked, approved for a loan, and receive their money in an instant. Investors are able to lend money with the click of a mouse, from the comfort of an armchair, without jumping through bureaucratic hoops. In a world of automation and AI, customers expect simplicity, convenience, and expedience, and fintech delivers.

P2P platforms are also incredibly efficient. Although the concept of lenders and borrowers is not dissimilar to the depositors and debtors you’d associate with banks, in the former case, pounds or dollars are matched on a one-to-one basis, without the middleman absorbing a considerable margin. Efficiencies are passed directly to the customer. This approach also reduces market risk, as there is zero leverage, which is inherent with fractional reserve banking. Challenger banks, fintech companies, and peer-to-peer lenders are helping to shape a marketplace where the only constant is customer-driven change. Whether banks, building societies, and other brick-and-mortar institutions are able to respond or not, the direction of travel is overwhelmingly positive for society.

The future

As well as being able to seize market share and carve out new markets, disruptors can also collaborate with existing market leaders to develop better products. It is likely that partnerships which leverage the strengths of each platform or company will play a key role in the development of financial services, including P2P lending, in the near future.

For example, a peer-to-peer firm might offer efficient, seamless technological integration. Another financial services provider may offer greater reach, a larger customer base, or a different set of technologies. Dovetailing their approaches is the basis for a mutually beneficial collaborative relationship. Those who are able to work imaginatively to build partnerships, and can incorporate the rapid advances of AI into their processes and products, will be best placed to steal a march.

For many fintech sectors, one of the biggest challenges is raising awareness of the products they offer, and their benefits. P2P may be an established force in the financial services fraternity, but the average consumer might still never have heard of it. Clearing this hurdle will be key to unlocking even greater levels of growth.

In the years ahead, consumers and businesses will continue to search for better ways to obtain credit. Investors are increasingly seeking a middle ground between the volatility of stocks and shares, and the typically poor returns on savings products. The convergence of these trends points to a bright future for peer-to-peer lending. Provided that platforms stay true to the principle that has made them successful to date – being fair to the customer in all they do – there is every reason to believe the sector will become a true powerhouse in the years to come.

— Inês Maia is head of risk at the peer-to-peer lending platform Lending Works