By Julian Sampson
Peer-to-peer (P2P) lending and crowdfunding are, for financial services, comparatively modern phenomena. They arose in the dearth of available lending capital post-global financial crisis and have enjoyed their role as leaders in the world’s FinTech bubble: leading the way in creating equity and debt facilities for small businesses, and in providing a return to investors above the current yields available in more traditional markets since the events of 2008 and beyond.
TWM act for and work alongside several leading P2P and crowdfunding lenders: be they SME and property focused like Assetz, Kuflink or Unbolted, or social enterprise biased like Crowdfunder. There are, however, a substantial number of companies within this field: and it seems as if one is being created every week.
So what, if anything, should one be aware of when considering acting as either investor into or recipient of P2P capital? There have been some significant global failures in the last 12 months which have (or should have) shaken the P2P tree a little harder. Deloitte published a report which according to Business Insider, “just trashed the hype around the online lending industry.” This detailed overview, however, shouldn’t be where the feedback stops. In truth, Deloitte act for significant institutions to whom the P2P market is arguably an annoyingly combative competitor. In fact, Santander recently announced a link to Assetz for customers to access alternative funding options, so there is appetite. The concern is in the stories from Swedish failure, TrustBuddy, and Lending Club in the US. An excellent summary was provided by another TWM client, in a recent P2PIQ post:
1. Investment Risk: What is the expected return on my investment net of fees, losses etc.? What is the loss assumption which the P2P lending site is using based on? Does the P2P lending site take into consideration the stage of the cycle we are in, or is it an over the cycle estimate?
2. Deployment Risk: What happens if my money is not deployed by the P2P lending site into loans, do I still get paid the same interest rate?
3. Fluctuating Loan Interest Rate Risk: If the underlying interest rate at which the P2P lending site lends money declines, does my interest rate decline as well, or is it guaranteed?
4. Early Access To Money Penalties: Does the P2P lending site have any penalties if I need to take my money out of the P2P lending Site earlier than the term I signed up for?
5. Ring Fenced Investor Money: Is my money ring fenced away from the risks of bankruptcy of the P2P lending site?
In truth, P2P lending isn’t new. Syndicated lenders, participant lenders, investment managers, bond issuers and the like have been engaging with and collecting collaborative capital from retail and High Net Worth investors in a regulated environment for decades. The difference here is that the emergence of the electronic trading platform (now regulated by the Financial Conduct Authority) has enabled FinTech entrepreneurs to enter into lending. Where our clients have differentiated themselves from others is their ability to maintain quality underwriting internally with these transparent platforms. If it’s all IT and no substance, then P2P lending may yet struggle and will be forced to consolidate: an opportunity for others to reinforce their substance over style.
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