European Peer-to-Peer Lending: Market Insight 2015

Peer-to-peer lending has continued to grow rapidly across Europe as lenders seek higher returns than are available from banks and borrowers embrace willingness to lend to sectors the banks are wary of such as small businesses in the UK and streamlined loan approval processes.

Platforms have scaled up to meet the opportunity, refining propositions, improving their credit assessment and other lending processes and strengthening their management teams.

Continued growth appears beyond doubt, creating further opportunities for those platforms which are able to execute their plans while avoiding lending pitfalls to keep their reputations intact.

What does the report cover?

• This report reviews the industry across Europe, with particular focus on the UK, which accounts for the overwhelming majority of lending activity.


• The report quantifies the scale of lending, historical growth rates, default rates and returns offered to investors while reviewing key factors behind these figures. It also includes an in-depth analysis of the relevant drivers of peer-to-peer lending growth including wider trends in banking and lending, other peer-to-peer trends and the regulatory environment. Our view of the outlook for the industry is based on this analysis of historical trends and drivers.


• The industry is frequently mentioned in the press with comments having particular focus on the level of returns which it offers to lenders, which are generally far higher than those from conventional banks, the degree of risk that lenders are incurring to obtain these returns and, in particular, the risk that returns may be seriously impaired by future widespread default.


• This report explores the background to these and other issues, exploring what has happened in the industry to key metrics such as levels of lending, returns and default rates, and the factors which lie behind trends.


• Leading platforms in the UK and across Europe are identified and profiled, and their performance and business models are analysed and compared.


• We set out our views on how we believe the market could develop in future, taking into account such trends as regulation, institutional funding and securitisation and the impact on and likely responses of the banks.

Who is it useful for?

• Peer-to-peer lending platforms


• Investors in those platforms


• Advisors including consulting firms, investment banks, lawyers and accountants


• Banks and other parties operating savings accounts and consumer / small business loans.


• Industry regulators and policymakers


• What are the sources and methodology?

This report is based on:

• In-depth interviews carried out by us with five leading peer-to-peer lending platforms


• Discussions with other parties with interests in the industry


• Extensive research into published industry sources


• In-depth analysis of the macroeconomic environment and relevant peer-to-peer lending market drivers


• Financial analysis of the accounts of and loans data provided by companies in the industry

Information from these sources has been synthesised and presented clearly and concisely with extensive use of charts and tables to illuminate points and support conclusions

Summary

Background

Peer-to-peer lenders operate as internet platforms which allow investors, typically individuals, to lend money directly to borrowers, without having to do so via a bank or other financial institution.

Peer-to-peer platforms originally focused on unsecured personal loans. However the concept has now evolved to include other variations such as:

• Loans to individuals secured on property or other assets


• Guarantor loans made to individuals where someone else, such as a parent with a higher credit rating, provides a guarantee of repayment


• Loans made to small businesses secured on the assets of the business and / or personal assets of its directors.


• Purchase of invoices from small / medium-sized businesses

Peer-to-peer lending builds on, and lies at the intersection of important trends in the modern economy:

• The development of the technology platforms needed to support secure and robust peer-to-peer lending platforms


• The increasing penetration of the internet into everyday life, which has allowed customers to get comfortable with entrusting large sums of money to an organisation represented solely by a website


• The development of the collaborative or sharing economy with peer-to-peer type models emerging across many markets.


• Widespread unpopularity of mainstream banks hence enthusiasm for an alternative


• A long period with low interest rates offered to savers giving them an incentive to seek out alternatives

The fundamental appeal to both lenders and consumer borrowers is getting a better rate of interest than is normally on offer from a bank. For small business borrowers, access to an alternative funding source which may lend to them when banks do not, and a quicker application process are even more critical.

Market size and growth

• Peer-to-peer lending has grown exponentially over the last few years with total lending across Europe reaching almost £1.9bn in 2014, having approximately doubled in each of the last few years.


• The UK is by far the largest market, accounting for 85% of the European total. However there are also significant markets in Germany and France, and platforms are being developed and launched in many other countries.

Drivers

• The main drivers of the sector have been its ability to offer attractive rates to lenders and borrowers.


• Recovering economies across Europe have helped platforms to reduce loan default rates. As the sector has reduced its perceived risk, rates offered to lenders have inevitably fallen.


• Consumer awareness has increased by double in the last 18 months but still remains below 50%


• Some of the larger peer-to-peer platforms have started to accept government and bank/institutional finance, in order to speed up their rate of growth and potentially lower their cost of capital. In the US, there have been examples of securitisation of peer-to-peer loans to create investment bonds.

Leading operators

There is now a series of established operators covering most European countries.

• Most of the longest-established and largest platforms, such as Zopa and RateSetter in the UK and Auxmoney and Pret d'Union in Germany / France and Bondora, based in Estonia but operating across Europe, focus on offering loans to consumers.


• But, there are also some operators, such as Funding Circle in the UK, which focus on small businesses.

Platforms are generally lean operations with few employees

• There are many variants on the core model with some platforms operating as pure marketplaces while others have evolved to resemble more structured ‘savings'-type products.


• Revenue models usually involve charging fees to lenders and / or borrowers which typically are in the region of 1-5% of the amount lent.

Outlook

Forecasts from those in the market and other commentators are for peer-to-peer lending continue to grow although rates vary dramatically with estimates for the UK market in 2018 ranging from £4bn to £30bn.

We expect to see growth, underpinned by:

• Recovery in consumer borrowing following an upturn in the economy and confidence levels. Continued ability of platforms to offer better rates than conventional banks.


• Increased awareness and customer confidence as the sector matures and is regulated.


• Availability of more funds from access to pension and ISA investment as well as from the wholesale markets

The key risks to growth include:

• Widespread defaults shaking lender confidence


• Falling rates offered by platforms to lenders


• A change in approach by conventional banks involving them becoming more competitive in savings and personal loans

However, we do not believe these will prevent the growth of the industry

• Platforms have learned from experience and appear to be managing risk and bad debt levels successfully. Furthermore, there does not appear to be a strong behavioural driver to encourage overselling, as was the case with sub-prime mortgages.


• The main driver of falling rates has been the increase in the volume of funds received from lenders. If funds become short, rates are likely to rise once more.


• Banks will find it hard to become much more competitive on rates without cannibalising their existing business.

In the future, we expect to see banks increasingly working in partnership with peer-to-peer platforms, using them to provide services where they cannot do so competitively themselves.

Companies mentioned in the report

• Abundance Generation


• ArchOver


• Assetz Capital


• Auxmoney


• Barclays


• Bondora


• Comunitae


• Crowdbnk


• Crowdcube


• Crowdcube MiniBonds


• eMoneyUnion


• Fitch


• Fixura


• Folk2Folk


• Funding Circle


• Funding Secure


• FundingKnight


• Geldvoorelkaar


• HSBC


• IsePankur


• Kokos


• Landbay


• Lendable


• Lending Club


• Lending Works


• LendInvest


• Lloyds Banking Group


• Market Invoice


• Mayfair Bridging


• Mintos


• Money&Co


• Moodies


• MYC4


• Pestiamoci


• PiggyBank


• Platform Black


• Pret d'Union


• Prosper Loans Marketplace


• Quid Cycle


• RateSetter


• Rebuilding Society


• Relendex


• Santander


• Saving Stream


• Smartika


• Smava


• Squirrl


• Syndicate Room


• ThinCats


• Trust Buddy


• UK Bond Network


• Unilend


• Wellesley & Co


• YouAngel


• Zencap


• Zopa