How are marketplace lending platforms really faring in these uncertain times?
I was a huge fan of ArchOver CEO Angus Dent’s heart-on-sleeve response to the UK’s Leave vote. He began by simply calling the outcome “a disaster for this country.” He finished by saying: “What a waste of all the hard work.”
But the rest of the UK’s alternative lenders have remained remarkably chipper in the face of a gathering storm of uncertainty. When the US marketplace lending sector first fell into a state turmoil after Renaud Laplanche was ousted from Lending Club, RateSetter’s Rhydian Lewis said “… in many ways, the UK has chartered a different path with our focus on the retail investor”. When the UK voted to leave the European Union, Funding Circle co-founder James Meekings said “the process of leaving the European Union will take two years and there will be no immediate change to Funding Circle’s day to day operations”. And when the FCA published its post-implementation review of the crowdfunding sector – raising a wide array of concerns about the industry, ThinCats chairman Kevin Caley said “we’ve been expecting this review for some time, and wholeheartedly welcome the opportunity to establish an agreed code of practice”.
Is this a collective case of braggadocio? Or is it more a case of “what on earth else are we going to say?” The truth is – irrespective of how well prepped they might be for economic shock, or how welcoming they are of regulatory intervention – alternative lenders are in the thick of it. The rhetoric might be “business as usual”, but the empirical evidence would appear to suggest otherwise.
Take, for example, a few of the changes that have materialised within the past month alone. Only a few weeks ago, AltFi Data cut its projection for 2016 UK origination by 14%, after the £840m originated in Q2 2016 became the first quarterly volume figure ever to fail to eclipse the sum originated in the preceding quarter. Now arguably this slow-down in growth pre-dates some of the above-mentioned phenomena (such as Brexit and the FCA’s review), but nonetheless it runs up against the “business as usual” party line. Doesn’t it?
We’ve seen a number of changes at the platform level. Funding Circle has been toiling for years to put together a long-term funding programme with the European Investment Bank (EIB). The Bank’s first investment – a commitment to fund £100m in SME loans through the platform – was announced on 20 June, alongside a £25m investment in the Funding Circle SME Income Fund. But then the UK voted Leave, and Funding Circle co-founder James Meekings admitted that the future of the EIB programme was in doubt. In a Business, Innovation and Skills select committee meeting, Meekings called on the British Business Bank to step up and plug the gap by backing small businesses through the Funding Circle platform.
Also relevant is the fact that Matthias Knecht quit Funding Circle Continental Europe at the end of June. Knecht was a member of Funding Circle’s global leadership team and a former co-founder of Zencap, a peer-to-peer lending outfit which Funding Circle acquired in October 2015. An article in Gründerszene suggested that a conflict had arisen between Knecht and Funding Circle CEO Samir Desai over the allocation of resources. If there was indeed a conflict, it feels as though Brexit had to have been a factor.
LendInvest, the UK’s largest marketplace for real estate loans, has also been making changes. In the immediate aftermath of the Leave vote, LendInvest tightened its lending criteria for loans worth more than £3m, adjusting the cap on LTVs for these loans to 65%. The company has also temporarily paused lending on new second charge applications.
Elsewhere in the real estate space, equity platform Property Partner is planning the launch of new bidding functionality, as it braces for more secondary market activity in the wake of Brexit. Discounts as wide as 15% (as a percentage of a property’s most recent independent valuation) are currently available on the platform’s secondary market.
But events of the significance of the UK’s Leave vote can often lead industry observers to suddenly see everything through the lens of post-Brexit pessimism, when the truth is that the hype surrounding the alternative finance sector has in fact been fading for some time. In his keynote speech at this year’s AltFi Europe Summit in March, Funding Circle CEO Samir Desai described 2015 as the year in which “it looked like we were turning water into wine”. He described 2016, by contrast, as a year for getting heads down, and for getting on with building business. It was clear, even in March – when Laplanche still ruled the roost at Lending Club, that the hype phase was over.
It may well have been overseas developments that precipitated the sudden shift in sentiment. The listed Swedish P2P lender TrustBuddy was revealed to be nothing more than a ponzi scheme in October 2015, and soon went into liquidation. A considerably more extravagant scheme was then uncovered in China, where P2P platform Ezubao was found to have fleeced investors for no less than $7.6bn.
During the interim and aftermath of these two events, the tone of mainstream media coverage began to shift – both in the UK, and indeed across the world. The Wall Street Journal has been set to attack mode. Its coverage of the US marketplace lending sector has become almost exclusively cynical. Within the last few weeks, for example, see: “LendingClub’s Newest Problem: Its Borrowers”. The UK industry is by no means free of such cynicism. FT Alphaville has been hounding after alternative lenders of late, and This is Money recently got in on the act by posting an article on the risks of RateSetter’s provision fund. That article was accompanied by an image of a swirling vortex of cash. And it would be remiss of me not to state that the This is Money piece (and a number of others) were in fact based upon analysis from AltFi Data, which was published on AltFi.com on 30 June. We at AltFi have by no means been immune to the general shift towards a higher level of skepticism, and it is perhaps unsurprising that tales of trouble and failure have garnered some of the highest page view numbers that we’ve seen on the site.
The Times, The Telegraph and This is Money covered the recent insolvency and subsequent acquisition of the business lender FundingKnight. How many other news items in the history of the peer-to-peer lending industry have enjoyed that level of attention in the national press? Not many!
Ben McLannahan, US Banking Editor at the FT, aptly summed the whole thing up when he posted on Twitter saying “#LendingClub = have we hit the trough of disillusionment?” He was referring to something called the Gartner Hype Cycle, which is an attempt to chart the typical growth trajectory of disruptive technology companies. They begin at “Technology Trigger”, run steeply upwards to “Peak of Inflated Expectations”, fall away fast to “Trough of Disillusionment”, climb steadily along the “Slope of Enlightenment”, and finally, if lucky, hit the hallowed “Plateau of Productivity”. McLannahan’s tweet, Desai’s keynote speech and general perceptions of marketplace lending (in the media, among investors, etc.) would each suggest that the industry is indeed mired in the perilous “Trough of Disillusionment”. The Lending Club debacle, Brexit and the FCA’s review will doubtless leave the “Slope of Enlightenment” in a decidedly slippery state, but these events are not responsible for bringing about the current status quo in the first instance. A period of disillusionment was always going to take hold at some stage.
So when next you hear a platform declaring “business as usual”, remember, they’ve been up against it for longer than you think.
Join AltFi at their fourth annual Australasia Summit to examine the future of lending in Australia. Where we present best practices across, technology, partnerships, open banking, governance, data access, consumer experience, capital markets & funding, the role of government and regulation.