P2P is an ancient asset class, but it is adapting impressively to meet the demands of the modern economy, writes Greg Carter
When considering an investment, how do you go about picking an asset class? One factor might be how long that class has been around. After all, with newer types of investment you might expect fewer people to understand the complexities, risks and rewards involved. We all know how the proliferation of collateralised debt obligations in the mid-2000s ended up.
While big financial services firms spin out new products all the time, there are asset classes out there that might even qualify as ancient. Peer-to-peer (P2P) lending is definitely one of them. In 12th-century Venice, for instance, merchants borrowed money from their peers to expand their businesses, and those with money to lend collaborated on various trade and export ventures.
Today, though, P2P lending is unrecognisable from those early beginnings. The P2P market’s growth reflects the world’s transformative pace of change: in 2016, new provision of ‘alternative’ finance across business lending, consumer lending and property-backed lending totalled more than £3.5 billion.
A useful way to characterise P2P is simply as a form of lending that directly connects parties with funds to other parties looking for funds. P2P platforms normally serve as marketplaces facilitating these connections. The absence of a deposit-holding intermediary in the transaction is the principal differentiator, as opposed to, say, a traditional bank. Removing these overheads creates the opportunity to give lenders and borrowers alike access to different kinds of investment and/or finance, with decent rates for both parties.
Within this basic framework, there are a number of different channels for potential borrowers and investors to consider. I’ve already mentioned three: lending to businesses, lending to individual consumers, and lending backed by property in some form. However, there are many forms of each of these variants, offering very different opportunities and a wide range of potential returns. (According to data from AltFi, 3-year net returns across all UK alternative finance companies were 19.16 per cent.) So where does P2P sit within the wider funding landscape?
Although the amount of money being channelled through P2P platforms has grown markedly in recent years, multiple studies have shown that awareness of alternative finance is still relatively low. In an annual survey from the British Business Bank, 45 per cent of respondents were aware of P2P platforms back in 2016, but this only increased by a small margin – to 47 per cent – in 2017. In a January 2018 survey conducted by Growth Street, we found that 76 per cent of respondents had only a basic understanding or no understanding of alternative finance. There is clearly more for P2P finance providers to do if the sector can really be said to have hit the mainstream.
However, in the last 12 months several milestones have been hit (and there are a few more in the offing too) that might just give awareness a welcome boost. The last year has seen several P2P platforms become fully authorised by the FCA, a positive step that I hope will increase people’s understanding of how these platforms function. In addition, a couple of the bigger players (such as Funding Circle and Zopa) are making noises about their IPO plans, another potential signifier of a maturing market.
I think most people in the industry would agree that there is much to do before P2P is afforded the same legitimacy as more established asset classes. One of the factors that may have so far limited the spread of P2P borrowing and lending is the absence of real, substantive transparency when it comes to platforms’ loan books. Having genuine oversight of one’s investment is an essential ingredient in building trust, and this principle applies to retail investors just as much as institutions.
Having said this, I envision a bright future when it comes to the new structures being enabled by regulatory and technological progress. Open Banking, for example, is set to give third parties access to the banking and transaction data of consenting consumers. Already, we’ve seen a concerted effort to improve access to financial services of all stripes, most notably through marketplaces – which are being touted by the big banks and challengers alike.
Where will P2P fit into this brave new ecosystem? With the public (slowly) becoming more aware of the potential in connecting directly with new investment opportunities, and when tech promises to transform the way people are introduced to new products and services, it’s sure to be an interesting couple of years ahead.
Greg Carter is the CEO and Founder of Growth Street
Capital at risk. Lending is not covered by the Financial Services Compensation Scheme.
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