When I read Ryan’s AltFi Global Summit piece this week about the concept of “ecosystems” in marketplace lending, I was struck by two worrying issues with the drive to permit greater intermediation and trading by institutions in the sector. In particular, the need to differentiate between marketplace lending and peer-to-peer lending, and within this, to outline how the US and UK markets operate very differently. Institutional investment has done a lot for the sector, but should we be careful what we wish for?
For several years P2P as we know it (with individual investors lending to individual borrowers) was illegal in the USA because of overly restrictive regulation. Conversely in the UK, lending to businesses (by anyone) was not a regulated activity. This looser regulatory regime was a nursery for innovation, and ultimately led to the development of pure P2P platforms, which have allowed thousands of private investors to access a new asset class previously dominated by traditional high street banks.
In the USA, when banks stopped lending to SMEs during the global financial crisis of 2008, alternative lending platforms swept in to fill the funding gap. However unlike P2P platforms in the UK, marketplace lenders used institutional money, which put platforms in a vulnerable position in the event of any changes to that flow of money. With institutions holding all the power over deal flow, if they decide to turn off the taps and not to lend to a platform for 3 months, it can lead to a real crisis for the platform.
As a result of the popularity of P2P in the UK, most of the larger platforms have more money than they can effectively deploy, to the extent that some have even turned away potential investors. These platforms have two distinct sources of funds: private investors and large institutions, and providing they have not relied excessively on a couple of very large institutional investors to achieve growth, they should be in a very good position. This is because, unlike institutions, private investors have no real alternative means to resolutely beat inflation, a situation which will remain until the base rate recovers to a sensible level and banks return to the market in force. Both of these things are unlikely to happen for several years.
So the move towards an ‘ecosystem’, and over reliance on institutional investors, is potentially dangerous for P2P lending, as it is fuelled by platforms on a ‘growth treadmill’, which they can’t get off due to the huge equity investments they have to be able to justify. The UK P2P market must not be dragged into adopting dangerous practices nor by misunderstandings on behalf of the regulators and policy makers. P2P lending in the UK must remember its retail investor roots. It is crucial to retain the individual investors making their own individual investment decisions and not push them aside because they appear to be a hindrance.
Much like the P2PFA has campaigned to highlight the differences between equity based crowd funding and P2P lending, we need to make sure that we explain the difference between P2P and marketplace lending. P2P is all about disrupting the market but if we are not careful we will be absorbed back into the market we originally campaigned against.