Peer-to-peer (P2P) lending stories have cropped up frequently in the financial press, pulling in businesses as diverse as RBS and Google, with great implications that this growing market will "revolutionise" lending.
In the UK, the Chancellor George Osborne opened up the country for P2P lenders in the Autumn Statement. In the US, Google sought the services of P2P lender Lending Club.
Go deeper with GlobalData
This month news emerged that investment banks Société Générale and Goldman Sachs were considering a move into the P2P sector.
Yet there may be a limit as to the degree P2P can challenge traditional lenders in the asset finance and leasing industry.
The Peer-to-Peer Finance Association (P2PFA) said £1.3bn (1.76bn) was lent through P2P platforms across all markets in 2014 across the UK, compared to £25.4bn of lending made through the UK in 2014 for asset finance, according to the Finance and Leasing Association (FLA).
Yet Sam Ridler, executive director of P2PFA expects the figure to double in 2015, partially because of deals between banks and P2P platforms.
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By GlobalDataReferrals
News broke last year that the UK-arm of Spanish bank Santander was the first to enter into a partnership with a P2P lending platform. Santander and Funding Circle agreed to refer customers to each other.
The arrangement is set so when Santander sends a letter declining a customer, it contains a paragraph advising customers to try Funding Circle as an alternative. The P2P lender will refer customers requiring day-to-day relationship banking support and other banking services to the bank.
The Royal Bank of Scotland followed the lead, after participating in the Treasury’s working group examining how best to encourage greater collaboration between high street banks and alternative finance providers.
RBS agreed to refer small businesses failing to meet its lending criteria to Funding Circle and Assetz Capital.
The high-street bank has already started referring small businesses in Scotland and South-West England, with a national roll out in SME business banking expected to be launched within the next three months.
These link-ups are likely to increase in the near future, as the Government encourages banks to pass on loans they are unwilling or unable to provide to alternative lenders.
A measure to create an alternative lenders platform was included in the UK’s Small Business Enterprise and Employment Bill, which the UK government intends to pass into law before the election in May. For policymakers this is a clear way to increase competition in the market.
The UK government’s support for the sector was also evident in December’s Autumn Statement, as it relaxed pressures on P2P lending scheme participants, removing the need to pay income tax on any bad debts incurred from lending through the P2P format.
Banks are not the only companies teaming up with P2P lending platforms. Accounting giant PwC will refer its small business clients seeking alternative sources of finance to P2P lender Funding Circle.
As part of the agreement, new Funding Circle borrowers will be able to access PwC’s My Financepartner service, which enables small businesses to operate their finance function and access expertise on a similar basis to larger companies, but on a more affordable and flexible basis, according to the accounting firm.
The most ‘unconventional’ P2P partnership was signed on the other side of the Atlantic. In January, Lending Club partnered with Google, to offer low interest loans to the search engine company’s US partners.
Google’s 10,000 partners, companies that help the technology group distribute its applications and services, will have access to two-year loans of up to $600,000 (512,000). The deal will allow Google to purchase the loans – an innovative securitisation.
Apart from partnerships, large organisations seem to be interested in funding P2P lending platforms and there speculation that some of the world’s biggest investment banks are intending to move into the sector.
According to the Financial Times, Société Générale and Goldman Sachs are among several banks discussing a plan to back Aztec Money, an emerging P2P financing platform that has created an online marketplace where people can bid for company invoices.
Growth potential?
These deals and funding could accelerate the growth of the P2P industry, but the phenomenan is unlikely to pose a significant threat to the growth potential of the leasing and asset finance industry, not least because of differences in the types of lending, knowledge and risks.
According to executive director of P2PFA Sam Ridler, P2P is a good solution for when traditional asset finance lenders cannot take the business because of due diligence risks. Banks that refuse to lend to some businesses will be able to maintain good customer relations through referring them, while P2P lending platforms will be able to provide loans to more companies.
Chief executive and co-founder of Funding Circle, Samir Desai, believes that banks can also benefit from greater efficiency.
"Banks are forced to use unwieldy IT legacy systems that are the enemies of efficiency and transparency, whereas P2P lenders are creating a financial revolution using cutting-edge technology," Desai tells Leasing Life. "That is part of the reason why P2P lenders and traditional lenders have begun to work in partnership,".
Despite the overall sentiment that these partnerships could increase business volumes for the P2P sector, Ridler suggested that it’s too early to assess the effectiveness and success of these schemes. The lack of data on the quantity and quality of referrals makes it difficult to evaluate whether it will become a significant force in increasing the P2P sector’s market share.
In addition Ridler questions whether the banks would have moved forward with these deals without government intervention and recognises the possibility of these banks creating their own P2P platforms.
The UK government may support the idea of collaboration between banks and alternative lenders, but in reality the two still regard themselves as competitors. This may affect the number of referrals, especially if the sector grows in size and competition heats up.
Desai says: "With time, online marketplaces can usurp banks and become the institutional framework of the financial world."
A potential banking from investment banks Société Générale and Goldman Sachs, could improve P2P platforms’ position in the lending market through the expansion of their activities.
Chris Cooper, managing director of Challenge Consulting, believes the main reason behind investment banks’ interest in this sector is the low returns in traditional areas of investment.
"Every investment manager or investment bank will be thinking: ‘what’s the next thing we can get a better return from rather than traditional markets’," says Cooper. "Traditional markets look so much more flat, with zero inflation becoming the norm and traditional methods and models of asset management looking less attractive. One of the jobs of the investment bank is to say ‘what next, when next?’."
This view is shared by Derek Soper, chairman of IAA-Advisory, who believes investment banks are under a lot of pressure from their clients to find markets offering better returns. "The competition for new markets and returns is very large and I don’t think we should be surprised of seeing these things coming along," he comments.
Lending doubled
Last year, the amount of lending, consumer and business, by the P2P sectors doubled compared to 2013 to reach £1.3bn.
At the same time, Finance & Leasing Association figures show that asset finance new business among its members also grew reaching £25.4bn in 2014, an increase of 13% compared to the previous year.
Given that £1.3bn is a total for all P2P transactions, the true difference in the turnover and comparative reach of both becomes apparent. Lessors need not worry in terms of competition.
Ridler said there are companies offering equipment finance, citing Funding Circle as an example, but she stated that this type of finance is not the focus of the industry.
The P2P industry players often provide loans unsecured with any collateral, financing ideas and product research and development. They have not rigorously entered the asset finance market.
Soper also doesn’t believe the P2P industry can compete in the asset finance market. "If you look at the equipment marketplace, all vendors have relationships with the leasing or asset finance market to give their customers a financial transaction. I don’t see it as competition at all, but it really depends what the P2P lending is for," said Soper.
"If there is a very clear security for the loan, then that transaction in the market will be too expensive if you went for P2P. The deal would be far better done through a bank or intermediary lender, or would be something that may be attached to a manufacturer in some way. If there is really good security involved, an asset lender would come along and do it," he said.
The leasing and asset finance industry’s expertise on understanding the financed asset is cited as an advantage.
"The clue is in the name, the heart of asset finance is the asset," comments Cooper. "The fundamental part of the raison être of the sector is an understanding of the asset, its acquisition, its use, its disposal, how the asset user or renter or guardian is going to use that asset through its life cycle. As long as we remember that there’s a clue in the name, that would be a differentiator from traditional lending, cash flow or P2P. In order for a P2P model in asset finance to be successful in the long run, it would need to have that understanding that there’s an asset in there, and it’s not just a lending transaction."
Risks and regulation
Risk is often identified by the media and industry professionals as an issue that could impede the growth of P2P lending. This factor differentiates this sector with leasing and asset finance, as the asset used as collateral provides security.
P2P platforms offer high interest rates, even 15%, which raises the risk of default. Interest rates represent both the propensity of default and supply and demand factors.
If default rates are high, this can affect the development of the market. UK P2P lending default rates are low, but they only go back a few years which makes accurate assessment difficult.
According to Ridler, the overall default rates in the P2P industry are low because companies perform thorough credit checking. She highlighted that even during the financial crisis, Zopa – the UK’s first P2P lending platform which launched in 2005 – did not experience high rates of default.
Credit checking processes have caused concern among investors since they are not standard and in some cases the details of the process are unclear. Some companies have credible and robust systems to perform credit checks, using big data and external credit checkers, yet others approve loans in minutes with few pieces of information.
FCA scrutiny
The sector has been recently scrutinised by the Financial Conduct Authority (FCA), which found that many loan-based crowdfunding platforms provide insufficient information as well as downplaying important information about risks.
In addition, the review found that some platforms’ promotions paired crowdfunding investing to saving accounts. This was considered an offence as it could give the impression to lenders that their capital was secure.
Desai wants the distinction between P2P investment and savings to be clear. "P2P is not risk-free. It’s an investment, not a high-interest savings account, and should be treated as such.
It’s riskier than a savings account, hence the reason the returns are so much higher (the average Funding Circle investor currently earns 6.3%), but it’s less volatile than stocks and shares, " Desai says.
The FCA has announced that this year it will not change its regulatory approach to crowdfunding, either to strengthen customer protections or to relax requirements that apply to firms. It will carry out a further review of this market in 2016.
Soper believes the P2P market will draw the serious attention of government and regulators only if it gains a substantial market share. Soper questions whether the government fully understands the market and its risks, since it is a new product.
He says: "I think if it remains modest, it would go under the radar. If it becomes significant and some substantial losses are made, then the FCA, the Bank of England and the government will ask what is happening. I think politics kick-in at a better position.
"It’s like the markets in 2008; nobody interfered because they all thought that most of the deals done were safe."
