Peer-to-peer lending (P2P) is continuing to grow in popularity, offering an online service to connect borrowers directly to lenders and in doing so they cut out the banks.
The P2P lending platforms are typically smaller, more flexible and more agile than the banks. They can attract borrowers and lenders who want to faster service and a better rate.
The term ‘direct lending’ is now the popular term used to describe P2P lending, reflecting the breadth of borrowers and lenders that now participate in the industry.
In fact, the direct lending market in the UK accounted for £4.5 billion of lending in 2017 – an increase of 21% since 2016.
Banks struggle with outdated technology and distribution costs (which are less cost effective for smaller loans). Whereas direct lending platforms have lower operating costs per loan than banks enabling them to compete for borrowers and lenders:
Direct lending has been popular for quite some time in the US and is seen as the norm. Now the ripple effect is seeing direct lending expand across the rest of the globe as people seize the opportunity to source an alternative way of financing.
This year-on-year growth is expected to reach USD1 trillion of assets under management by 2020 – a more than 20 fold increase since 2000.
The continued rise of alternative credit has been due to:
Market conditions – the global credit crunch
Investor demand – seeking alternative finance with volatile stock markets and rising inflation
Borrowers seeking lower rates and quick loan decisions
The UK direct lending market is continuing to thrive with more than 100 lending platforms in the UK and more cropping up to steadily seize the new opportunities. This has created a rather fragmented lending market – but a competitive one.
Between 2016-2017, mid-sized platforms increased their potential to compete, growing their market share by approximately 50% to £1.6bn.
The ‘the big four’ as recognised by Techbullion two years ago – still reign – with two-thirds of the market today still being dominated by Zopa, FundingCircle, Ratesetter and LendInvest:
Be that as it may – how long will these four rule the roost with an increasing number of mid-sized operators? A lot has changed in two years. There are now over 80 successful direct lending platforms:
Not only this, but we are also seeing the big banks revive and return to providing loans in parts of the direct lending market.
Who will be the major players in the future in this increasingly crowded market?
The flight to quality
The rate of growth in the direct lending market will potentially slow down as there is a ‘flight to quality’ over the next 1-2 years that will improve the trust and reputation of the industry. As better lending platforms outperform and grow faster, the weaker platforms will fail (many have already done so):
Direct lending platforms will also be increasingly staffed by financial experts who will make the decisions, rather than tech-only businesses.
The continued increase in competition may also lead to more platform failures as it becomes tougher for those platforms to sustain the revenues to cover their cost base.
However, there is still huge opportunity for direct lending to continue to grow in the future – especially in Europe where we are still catching up with the US.
Direct lending is still only very small when looking at the lending market as a whole:
The direct lending market is currently still in its opening phase, but the future will see more tie-ups between direct lending platforms and the traditional financial players wanting a share in the profits in the near-term future. Consolidation in the form of direct lending platforms coming together looks set to happen in the long-term.
Companies outside financial services will also likely be included in future associations with direct lending companies.
Banks are likely to continue to distribute capital through direct lending platforms, but forecasters predict that the banks will also start using lending as a source of capital.
Ultimately, direct lending is here to stay and the prediction is that it will become an increasing component of asset allocations for retail investors (which remains largely untapped thus far) and institutional investors.
Banks have potentially ‘overcorrected’ after the global financial crisis and now the banks’ appetite has normalised. Banks are now re-entering the loan market and will want to take a share in the direct lending market. Open banking initiatives may also lead to the integration of direct lending services within the banks package of products to their customers.
It will be interesting to see who remains a major player in the direct lending market with the banks once again competing with direct lenders.