It’s an excellent market survey, very readable and the good news is that it’s pretty much relentlessly upbeat about prospects for P2P lenders, although to be fair the report doesn’t ignore some obvious risks such as growing default levels and the threat from high street banks….but the good news is that Apex reckons the P2P platforms should eventually overcome these challenges and triumph!
Apex reckons that globally the total amount lent on peer-to-peer lending sites worldwide should reach £1.6bn during 2013 – as a result of this rapid growth spurt, “this will take the total amount lent during the life of the sector to more than £3bn”.
Intriguingly the APEX researchers argue that the UK is still very much the leader in relative terms, even though aggregate trading volumes in the US are much higher – looking at P2P lending relative to population £ head, the researchers believe that the UK is at £4.9 per head versus £3.4 for the US!
Looking at future projections, the report quotes Jason Jones, one of the founders of Disruption Credit (an investment firm which focuses on the online lending industry) who predicts that “the US will see the value of peer to-peer loans originated increase to $20bn by 2016,from current levels of around $2.4bn”. The report also quotes from recent studies by both the Open Data Institute and Nesta which suggest that UK growth could be even more rapid, with P2P lending potentially hitting as much as £12bn per year. According to Apex, interviewees for the report think these estimates for rapid growth are fairly realistic:
“The Nesta report forecasts £12bn. The industry has great potential. I think a maximum of 25% (of lending) but it’s more likely to be 10-15% within the next 5 years”
“I use the Nesta report as a guide. I agree with growth to reach 20% of loans in 3-5 years.”
“Within three years peer-to-peer may account for 20% of unsecured lending”
“I think it might take 2-3 years to get to £1bn in lending”
“The market in the UK is currently worth millions of pounds and is doubling every year. I think it will get to 10-20%, maybe 30% of lending within a decade.”
The report also faithfully lists the big risks facing the sector, including -
• a big fall in the rates offered to savers – this is likely to happen, with rates going lower. One interviewee suggests that although their investors on their platform typically “achieve 10% rates, they expect that to fall to 8% over the next few years”
• widespread default leading to poor returns with accompanying brand reputation damage – the report’s authors (and interviewees) think the worst will be avoided, with most platforms able to maintain bad debts at “acceptable levels”. As one interviewee puts it “it’s in the peer-to-peer companies’ interest to keep bad debt under control”. But keeping defaults at a low level might force more and more platforms to follow the likes of Zopa in taking control of risk management – the UK’s major platform recently withdrew its category of loans where savers selected individual borrowers. The report suggests that default levels will also stay low because the main platforms lack an ” obvious behavioural driver, such as a sales force motivated to lend without regard to creditworthiness of the borrower”
• The conventional high street banks fight back – the report suggests that the main high street banks could attack P2P product sets, with one interviewee in the report suggesting that the sector has ” a 3-5 year window to build the credibility of the sector. If the banks get back into personal lending seriously by that then, I hope we’ll have enough credibility to be able to continue”. In reality Apex believes the big banks will actually choose to work with P2P platforms rather than fight to the death. The report suggests increased convergence is more likely with platforms offering ” further financial services to their customer bases and potentially applying for banking licences”.
Given this fairly positive prognosis, what are the key action points for the P2P platforms, large and small?
For the major, established players Apex suggests three main priorities:
• “Protect their reputations of their core offering by avoiding bad debt risks
• Continue to innovate their models and explore new options (perhaps using sub-brands or otherwise-differentiated offerings to protect their core brand) to keep their offers fresh and competitive
• Maintain their leading position by focusing on continued growth – which may include tie-ups with other funding sources such as banks or investment managers”
Looking at insurgent platforms, four key drivers for future success emerge -
1. The business model shows an element of innovation.
2. They target a niche – either lending or saving – that is not well served by current offerings.
3. They are able to access large volumes of funding from a saver base – such as via a conventional bank tie-up – which frees them from the constraint of needing to attract retail savers.
4. They have credible reasons why they can expect to offer good returns.