In one of Europe’s largest economies the total volume of consumer loans (i.e. installment credits, overdraft loans and related) is about 225 billion EUR.
P2P lending in Germany started in 2007. As of now, there are 3 larger services operating in the market: Auxmoney, Lendico & Zencap. One of the pioneers, Smava, repositioned in 2012 and now focuses on brokering bank loans. A fifth service, bootstrapped Finmar, is still struggling to gain traction.
Auxmoney has originated 128 million EUR loan volume to consumers since launch. Currently the monthly growth rate is approximately 7 million EUR. Loan amounts available are up to 25K, with loan terms ranging from 12 to 60 months. Auxmoney assigns borrowers an own credit score which defines the interest rate of the loan request. The main fee charged is 2.95% origination fee from the borrower and 1% origination fee from the investor. One specialty of Auxmoney is the possibility for the borrower to offer the car as collateral for the loan. So a fraction of loans are in part secured by an asset. Recently Auxmoney started working with institutional investors and at random assigns some of the loans to a whole loan program.
Lendico launched in Germany in Dec. 2013. It offers p2p loans to consumers of up to 25K for 6 months to 5 years. Lendico is not publishing much data on business growth, the latest available figure is 0.38M EUR loan volume originated in June (though that probably includes the other international markets of Lendico). Lendico assigns borrowers own scores A-E, which define the interest rate of the loan request. The main fee charged is 0.25% to 3% (depending on score and loan duration) origination fee from the borrower and 1% on each repayment (instalment and interest). Lendico recently allowed German investors to lend cross-border in Spanish loan listings.
Zencap, which like Lendico, is owned by Rocket Internet, launched in March 2014. Zencap offers peer to business loans of up to 150K for durations from 6 months to 5 years. The latest figure for loan originations that Zencap told P2P-Banking.com was 1M EUR per month. Zencap sets interest rates in relationship to credit scores. The main fee charged is 1 to 4.5% origination fee from the business and Zencap deducts one percentage point from the interest rate (so on a 6% loan investors are effectively paid 5%).
It seems like Auxmoney’s strategy is to grow with a mix of loans ranging across a wide spectrum of credit grades. Lendico on the other hand seems to focus on borrowers with better credit grades. Also Lendico verifies income statements of all borrowers whereas on Auxmoney income is self-reported and sample checked.
For retail investors the outlook abroad with higher interest rates on offer is an option too. Bondora in particular gained many investors in the German market, helped by the fact that, with SEPA, transfers are mostly fee-free and without currency risk.
Under German law (‘Kreditwesengesetz’) only banks may originate loans. To comply with regulation each p2p lending service has to partner with a Bank which formally originates the loan and a split second later sells the rights to proceeds to the investors via the platform. This requires a complex legal (and technical) structure in which no direct contractual relationship between investor and borrower exists. Auxmoney partners with SWK Bank, Lendico and Zencap with Wirecard Bank and Smava and Finmar use Fidor Bank.
The regulatory complexity is also the main reason that none of the German platforms feature a secondary market. While all 3 have told P2P-Kredite.com that the legal issues are solvable they say a secondary market is not a priority on their product development list.
Laws also prohibit usury; therefore prohibiting APRs that are more than double the market average which caps maximum possible interest rates somewhere around 16 to 18%.
Unlike the UK, the government is indifferent (at best) to alternative finance. And while there has been some media coverage it has been a far cry from the extensive and positive coverage in the UK.
One challenge for German p2p lending services offering consumer loans is the very competitive market environment for unsecured instalment loans. The average interest rate at which banks are currently making these is 5.7%. This does not leave much room for p2p lenders to compete on price. Smava tried a strategy focusing on self-employed borrowers, as it is harder/more expensive for those to obtain a loan from the bank.
Credit card use is not as widespread as in the UK or US so there is not much high interest consumer debt to be refinanced. Most Germans instead use the overdraft facility of their bank account for short term needs which typically charges interest rates around 9 to 13%.
Under these circumstances it is hard for the services to attract borrowers at reasonable marketing costs. Winning investors on the other hand is mostly not an issue.
With the legal and infrastructure entrance barriers there will likely be far fewer new entrants in the p2p lending market than in the UK in the future. The sector is seeing stable growth, which could accelerate should the services manage to raise public awareness for p2p lending.
Claus Lehmann publishes P2P-Banking.com, an industry news site on p2p lending, and P2P-Kredite.com, the largest German language information resource on p2p lending frequented by German, Austrian and Swiss investors.
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