A surprisingly controversial topic has been the name of the sector to which the book is addressing, which is the intersection between what has typically been called “P2P Lending” and “Crowdfunding”. The FCA has established these as two halves of the same activity: market-sourced funding, one for equity, one for debt and has used “Crowdfunding” as the catch-all term. This is understandable in my view, as “funding” relates to neither side of the equation, and the “crowd” remains the same as it ever was.
What surprises me is the varied opinion of operators. Some P2P lenders are deeply uncomfortable with the FCA’s “Crowdfunding for Debt”, feeling it is a term into which they have been co-opted which doesn’t apply. Some are ambivalent about the term and accept its legitimacy and clarity. Others are coining a new term for P2P, “Market Lending”, as referenced by AltFi’s contributing blogger James Levy last week.
Why does it matter? I hear you cry. And, to a great extent, you are absolutely right – it shouldn’t matter a bit. The sector is young and can cope with such changes at this stage.
However there is an interesting dynamic here, no more than a subtle shift in emphasis, in which “the crowd” is downplayed in favour of “the market”. This terminology is reflective of a post-regulation landscape, in which the traditional finance sector is circling the wagons to see what role it can play in alternative finance.
Fund managers and intermediaries are keen to understand how they can profit from this newly accessible market and we are beginning to see the emergence of designated funds, like P2P Global Investments, that plan to participate on platforms as “Super Lenders”.
By common consent, these funds will be taking substantial parts of (or entire) loans, and offer investors the ability to participate in a “lending fund”, without being part of any individual loan or contract. Additionally the government now makes up 20% of loans on some business lending platforms. Venture Capital firms are now beginning to make their presence known by shoring up investments with crowd-sourced equity.
This creates an interesting dynamic – the re-intermediation of a dis-intermediated sector. The great value of P2P Lending in its earliest incarnations of Zopa and Funding Circle was drawing together two estranged parties – the borrower and the ultimate lender, i.e. the depositor. The reintroduction of funds and institutions should not necessarily be a cause for concern, but it will also sound a note of caution to consumers. The introduction into a market of Big Fish rarely offers hope for Small Fry, which is all too often how financial services has treated the individual investor. The main concern for self-investors will be what this means for returns, and a subsidiary concern as to what power institutions will wield in the market.
There are no histrionics here: there is a strong argument that institutions will be a force for good in growing crowd-sourced finance - creating more resilient businesses, ensuring greater oversight of credit teams, shoring up growth with consistent injections of liquidity. Platforms ultimately are businesses, and will base decisions on behalf of shareholders – the question remains whether consumer access is desirable from their perspective. There will be differences of opinion on this point.
What has been comforting, from the perspective of the armchair investor, is that most of the platforms I have spoken with have reiterated a commitment to maintaining strong and vibrant consumer-facing brands. There is a clear case for a consumer presence in the sector whilst the FCA remains committed to enabling more competition (though whether they will continue that stance should there be a major failure in the sector will remain to be seen).
Regulation was seen by many individual lenders as a chance to protect the market beating rates they were enjoying. The inevitable consequence has been to introduce more competition for those rates. With regulators committed “to protecting investors from themselves” – such as an insistence on equity platforms warning off consumers from risking more than 10% of their portfolio – the next few years of growth require thoughtful consideration for the sector to reach its potential as “alternative” to the existing financial services environment, and not just a curious sideshow for a small minority.
One operator described regulation recently as “the end of the beginning”: now that P2P Lending has enjoyed its childhood innocence, these are some of the growing pains that it must endure in its adolescence.