With two Israeli peer-to-peer lenders readying for life in the public markets, investors are wondering if long term these fintech companies can live up to their racy private market valuations, writes Yonatan Brand.
Tarya and Blender, two of the four peer-to-peer lending platforms active in Israel, have just announced they are going public. Blender through a traditional IPO and Tarya through a merger. The two platforms will join a number of other P2P platforms that have listed around the world. But can the P2P model be a success in the public markets?
Few of the current publicly-listed platforms have not yet delivered the big promise lying in their stock price. On the contrary, all the traded P2P platform’s stock prices have fallen dramatically since their initial listings.
True, Funding Circle, a UK-listed SME lender, which IPO’d in 2018, has seen its share price soar since market lows last year but is still down c.75 per cent from its debut price.
P2P platforms were a big promise in the last decade. Using the worn-out “UBER it” phrase they strived to eliminate the financial intermediaries and connect directly between lenders and borrowers.
Doing so, the interest (and the risk) from the debt shifted directly to the private lenders allowing them to benefit from higher returns. The platforms earned a fee for each transaction. The question is are fees alone are enough for a sustainable business model?
Out of hundreds of P2P platforms active in the last decade, many have shut down. The more successful ones have shifted their model away from the P2P retail market.
A large number, perhaps a majority, have become originators for institutional investors only (such a Landbay). Others, in much lesser numbers, become banks themselves (such as Zopa). A few were bought by big institutions (like Ratesetter).
Is the problem in how P2P platforms make money? The answer is written in public companies’ reports. Some P2P platforms are forced to spend a major part of their budget on marketing and sales, even up to around 30 per cent of the budget. This includes Lending Club and the upcoming Israeli IPO Blender.
This expense serves both loans origination and funds from investors. The 30 per cent ratio of marketing and sales expense is similar to private lenders expenses. But, for private lenders, this expense serves mainly for loans origination and therefore is much more effective.
The other side of this expense is the revenue coming from the loan origination, while private lenders enjoy both transaction fee and interest rates the P2P platforms enjoy only the fee.
Since funding cost or operation cost is not cheaper for the P2P platforms in comparison to other digital private lenders, there is no advantage for the P2P platforms.
The short history of the sector reflects this problem through stocks prices. There are five significant public P2P platforms from different geographics. None of which have seen their share price soar, although all are still in business.
1. Lending Club, Most famous of all P2P platforms, IPO’ed in 2014, ever since the stock went down 90 per cent and could not achieve profitability.
2. Funding Circle, IPO’ed in 2018 and stock went down 75 per cent,
3. Fellow Finance, P2P from Finland, refreshingly profitable for some time until 2019. Still, the stock went down 67 per cent since IPO.
4. Raize, Spanish P2P, IPO’ed 2020. The stock fell more than 60 per cent since its IPO.
5. Plenti, P2P from Australia, IPO’ed recently and has traded below its IPO price with high volatility.
What can justify such a dramatic decrease in the stock price? Surely investors were aware of the problematic loss driven business plan. Evidence shows that alongside major operative losses ever since IPO the loan book results also deteriorated. Since IPO, more loans defaulted and more losses occurred in some instances.
The headlines from 2016 regarding the Lending Club loan book were a good example of this issue. Academic research, comparing two P2P platforms, shows the bad impact that IPO has on the platform’s loan book.
Obviously, the P2P business (the equity) is not yet shown to be a good investment in the public market. Why then, are more P2P lenders IPO’ing and investors participating? One main answer is that investors are highly optimistic and don’t learn from past mistakes. The other answer is that the P2P platforms are now promising something else.
They claim that P2P brought them so far but now they are going to be something completely different. Take Blender for example. The company is in progress for an EU bank licensing and developing a technology for buy now pay later service like Klarna. Lending Club has bought a bank.
Tarya stated it’s developing banking core technology that it will sell in an F-Paas method to clients from Africa. Will this happen or will the future of these companies be like any other traded P2P?
Yonatan Brand is the co-founder and CEO of Fintech Partners group. The views and opinions expressed are not necessarily those of AltFi.
21 March 2023
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