Signs of a Slowdown in UK Marketplace Lending Origination

April saw the UK Liberum AltFi Volume Index, which tracks origination in UK Alternative Finance, move £280.7m higher. This is the third biggest move on record with only March and February 2016 bettering it.

Figure 1: Monthly LAVI Origination Volume

So, unlike in the US, the rate of growth in UK volume persists? Not so fast. On a year on year basis, there are in fact signs of a slowdown.  Year on year growth was only(!) 36% in April, the lowest level since September 2011. What could be behind the drop? Firstly, we should point out that this is just a one month drop in growth which could therefore prove to be an anomaly and not a change in trend. Bearing that in mind, we can think of several possible explanations for the dip:

• A similar phenomenon to that being seen in the US – a drop in investor demand caused by increased concerns over credit, negative press, ratings agency action and less compelling value relative to other asset classes. This is perhaps unlikely, particularly in light of the fact that the investor mix in the UK is better balanced than that of the US, with less reliance on institutional capital, and also the recent successful close of Europe’s first marketplace lending securitisation.
• Easter fell at the end of March and there is often a ‘holiday period shadow’ seen in origination volume – a drop off after a holiday period. However, Easter fell at virtually the same time last year, so this should not have impacted year on year growth.
• Property secured lending was lower than the recent run rate in April. This comes after record volumes of property secured lending in March ahead of the change in UK tax laws. Perhaps some deals that would have otherwise happened in April were brought forward to March and April’s origination volume suffered something of a hangover as a result. 

Whatever the reason, it is too early to tell if this is an anomaly or the start of a trend, but we will be monitoring volumes closely over the next few months.

April saw new origination highs set by several platforms, mostly newer platforms. They were:

• Lendable (£2.64m)
• MoneyThing (£2.3m)
• MarketInvoice (£40.7m)
• CrowdBnk (£3m)

At the other end of the scale, there are still two platforms that are yet to originate a loan this year: Proplend and Relendex, this is down from the three that we identified last month.

Figure 2: Market Share of the UK’s largest five platforms

The smaller platforms continue to cede market share to the more established platforms as can be seen in Figure 2. The largest five UK platforms now have a market share of 82%, a level we've not seen for 3 years. The remaining 21 platforms appear to be struggling to scale fast enough. Marketplace lending platforms need scale in order to be economically viable. Revenues are largely a function of origination – 3-4% of origination for most platforms. For more details take a look at the article that we wrote late last year looking into platform fees. Depending on the exact model, and who you talk to, the origination volume required to breakeven varies, but it is likely between £5m and £10m monthly origination. Without that critical mass, platforms will be burning cash and may require further equity capital to sustain their operations. Anecdotally equity capital has been becoming tougher to source in recent months and, post LendingClub’s share decline this week, it will have become tougher still.

Figure 3: Monthly LAVI Origination volume by platform

Figure 4: Monthly LAVI Origination volume of the smallest 15 platforms

Unless the smaller platforms can scale, they will likely disappear. Unfortunately, there is little evidence of the majority of these platforms scaling fast enough. Figures 3 and 4 are screenshots from AltFi Data’s newly launched Analytics service. They show monthly origination volumes broken down by platform. In Figure 3 the strong origination growth of the larger platforms is plain to see. Figure 4 shows a closer view of the smaller platforms. In the mass of coloured lines there is no obvious upwards group trajectory. Indeed, some platforms appear to be experiencing declining monthly origination volumes.

Many commentators predicted 2016 would be a year that would see platform consolidation (for example here, here and here). These charts further confirm the bifurcation of growth. Will the recent travails at LendingClub prove to be the final straw for small platforms struggling to achieve escape velocity?  Or will investors reconsider and recognise that small can be beautiful? See you next month…