P2P platforms can radically reduce the costs associated with setting up a business lending infrastructure. In an already-crowded market, this could be the difference between success and failure – especially for younger operators. Lorenzo Migliorato assesses the model’s potential.

Describing what P2P lending would look like three years from 2015, Warren Mead, head of alternative finance at KPMG, envisioned a market characterised by consolidation among well-established players, huge institutional investment in platforms, and increasing willingness on the part of banks to rely on P2P as an originator.

Fast-forward to 2018, and Mead’s forecast seems to have hit the mark – though perhaps not always through the most obvious chain of events. In a trend that mirrors P2P’s evolution in the US, institutional lenders have invested substantial wholesale amounts in P2P platforms: MarketInvoice reported last year that institutional capital in its coffers had grown fourfold since 2014, eventually accounting for more than a quarter of all its lending.

For the most part, the money has not come from big-name banks, which have so far stopped short of providing direct funding into P2P, and limited the interaction to low-key collaboration: in 2014, Santander UK and RBS began referring businesses that did not meet their lending criteria to Funding Circle, with no commission fee involved. RBS then evolved the model into Natwest Capital Connections, a “signposting” consortium that currently includes Funding Circle, Assetz Capital and Seedrs among its P2P lending members.

High-street lenders, then, do not seem in any rush to make their grand P2P entrance. So what players are injecting cash into the channel – and what is in it for them?

The newcomers

P2P platforms radically abate the cost of setting up a business lending infrastructure; this can prove highly attractive for younger entrants to an already-crowded lending market.

Banco BNI Europa, a digital-only bank from Portugal, made partnering with fintechs a staple of its business lending expansion strategy in Europe: over four years of operations, it entered into funding agreements with more than a dozen marketplace lenders, starting with MarketInvoice in the UK and including Funding Circle in Germany and Fellow Finance in the Nordic countries.

“We had done some lending to businesses in Portugal, but in very limited volumes,” says Pedro Coelho, BNI Europa’s chair and chief executive. “Because of the high cost of funding, we would not be able to compete head-to-head with the typical local bank here in Portugal. So we decided to get [into] some partnerships where we would have a competitive advantage.

“We believe these [P2P] lenders have competitive advantages in their own market, because they present themselves to the client in a different way to the traditional banks. Until banks realise they need to speed up and find other ways of processing credit, we have an advantage.”

Occasionally, the collaboration runs both ways. After BNI Europa partnered with Ebedex, an online invoice finance provider in Belgium, the fintech began to rely on BNI Europa to originate business in Portugal.

The investment banks

Well-established financial investors are also using wholesale P2P funding to expand into a market segment that has traditionally been outside their scope.

In January, Citibank provided a £50m (€57.2m) loan to an SME lending fund operated by Funding Circle – a move that effectively allowed the US banking giant to dip its toes into SME lending through what it does best: asset management. German investment bank Varengold, meanwhile, has extended capital to a number of European platforms since 2014, albeit the only name it made public is MarketInvoice, in which it invested £90m. The partnerships with the P2P sector have so far mostly taken the form of wholesale funding, but Varengold is looking beyond that.

“At the end of last year, we decided we had to rename what we were doing, and we called it ‘marketplace banking’,” says Lukas Diehl, who heads Varengold’s operations in the segment. “That means that we would approach the marketplace lending out there, not only by providing lending funding to them, but also through the development of further products that would help the P2P platform.”

Diehl mentions the possibility of making Varengold’s licence from German regulator BaFin available to the platforms, should regulations become more stringent, or providing them with the bank’s payment infrastructure. “There are other services that we add on top of the pure lending, and that is why, internally, we call it ‘marketplace banking’.”

The established financiers

For their part, asset finance providers have been keeping an eye on P2P expansion in business lending, not only as a new origination avenue, but also as an opportunity to strike brokerage partnerships.

For instance, RateSetter, born as a consumer lender, has been gradually refining its business lending offer, recently making it secured-only. Last August, Corporate Asset Solutions (CAS) became the exclusive originator for RateSetter’s newly launched HP offer. Through the move, CAS acquired a potentially profitable brokerage business, and RateSetter received introduction credentials to the asset finance market. A spokesman for RateSetter specified that on all referred business, RateSetter would apply its own credit assessment process.

Conversely, some asset finance firms have been experimenting with P2P as a means of casting a wider net among SMEs. Last December, Investec selected MarketInvoice to originate part of its business, attracted by the platform’s customer outreach and servicing capabilities, and says it would provide some £50m to fund invoice financing.

“How a potential partner interacts with its customer base is a key consideration for us,” Investec said in an email. “Our belief is that P2P and fintech platforms are a strong addition in the provision of funding to UK SMEs.

“However, their major challenge is client acquisition, whereas traditional funders might have less efficient delivery channels. Our view is that a hybrid model is the most likely to succeed, which is why we are prepared to explore partnerships in these sectors.”

Investec declined to disclose whether it was looking into other P2P partnerships, and specified that the partnership with MarketInvoice is only a small-scale pilot.

Current and future benefits

There are a number of reasons behind each institution’s investment in P2P. In some cases, the purpose is clearly to get an avenue into the market through a partner with greater customer reach and visibility. In others, the rationales are not always so clear cut.

“There’s doubtless a cocktail of motivations at play here,” says Gavin Stewart, regulatory specialist at Grant Thornton UK, adding that all parties arguably see the investment as an entry point for digitalisation and online loan origination – the “disruptive” elements that P2P brought to the table over a decade ago.

For the high street banks, another driver, “certainly originally, was to partly bridge the gap in the small business lending targets government had set for the big retail bank’s during the crisis”.

Investment banks, meanwhile, are harder to assess as they come from a radically different angle. “[Citi has] no existing stake in the SME market to speak of,” says Stewart. “It is hard to see Citi in this space on any scale. They may simply see it as a decent investment, and partly a hedge in case the P2P market takes off.”

On the other hand, debt facilities might only be part of how banks want to approach the channel. Challenger banks like BNI Europa have, so far, been exclusively debt providers, but Coelho says bigger banking groups have building equity stakes in P2P platforms.

Coelho says that depending on strategy and firepower, some institutions might see acquisition as a faster avenue to the burgeoning channel. But at that point, could they restrict the platform’s freedom in choosing its funding partners?

“It could happen,” says Coelho. “It could be that [the controlling] financial group has an appetite for higher volumes, but wants to be the exclusive debt provider of that platform.”