Why does the UK lead the way in peer-to-peer lending?

By Stuart Law on 3rd February 2015

When it comes to alternative finance – and P2P lending in particular – the UK is in a very privileged position.

Why does the UK lead the way in peer-to-peer lending?

To be clear, we’re not saying that the UK market is unequivocally better than the rest of the world. The US market is more advanced in other ways (there are greater volumes of institutional money coming through, and a platform has already had an IPO out there which exceeded all but the most bullish expectations) and other countries have larger markets, but in terms of history, sophistication and lending per capita, the UK market stands tall.

So why is that?

We believe there are six main reasons why the UK is leading the way in peer-to-peer lending, and roughly in this order :

  • Government support
  • Favourable  and proportional regulation
  • High public use of internet for financial services
  • Geographic advantage
  • Favourable economic trading conditions
  • First mover advantage

Government support

The Government was quick to recognise the potential for the P2P industry, and several branches have given it considerable support as a result. We’ve seen the British Business Bank invest through P2P platforms, possible ISA inclusion and lots of high-profile backing. That’s something not all countries have enjoyed, and has played a significant part in our success.

Favourable and proportional regulation

The UK had an edge here: the body responsible for financial regulation (the FCA) appeared to recognise the potential for P2P lending and allowed it to grow for several years before entering the market with sensible, proportionate regulation.

Another advantage afforded to the UK is that regulations are broadly similar across England, Scotland, Northern Ireland and Wales. Contrast this with the USA, where laws vary state by state. The UK industry certainly would have struggled if there was a different regulatory requirement for each county!

High public use of internet for financial services

The UK has one of the highest internet usage levels in the world and this helped online platforms get established quickly and at low cost versus other countries, in particular making the acquisition of lenders more cost effective. Nonetheless some platforms have used up the equivalent of several forests sending direct mail to potential borrowers !

Geographic advantage

Simply put, the UK has a lot going for it. For richer or poorer (mostly richer), it’s a finance centre – among other things, we’ve got access to the right staff, a stable economic environment, lots of businesses looking to borrow and lots of investors with money to put to use. Don’t go thinking this is a London thing either – successful platforms have sprung up across the UK, including our humble HQ in Stockport.

Favourable economic trading conditions

The timing was right for the nascent UK industry; people were sick of banks at the time and desperate for an alternative to the low rates on offer in savings accounts. In addition the UK moved strongly and early with economic support measures like QE and this helped to create a benign credit environment to support low default rates in the early years of the industry.

But, there was also a real buzz around startups in general, and people were keen to embrace different ways of doing things. It’s hard to say with certainty, but it doesn’t seem likely that this feeling would have been echoed in Europe’s traditional financial centres of Luxembourg and Switzerland.

First Mover Advantage

Zopa launched in 2005. In terms of the speed at which fintech and the P2P market evolves, that was aeons ago – in fact, it was before the recession which prompted people to look to peer-to-peer lending as an alternative to banks.

Dozens of platforms followed in its wake, and the UK industry reached a stage of relative maturity before many of its competitors.

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Will we still see ourselves as pioneers in five years time? Time will tell, but the while the UK certainly has its work cut out, the situation looks positive. Lending volumes are increasing at a stable rate, political support continues and the industry is well-equipped to continue its growth.

Of course, we’re looking forward to seeing what happens in other countries – there are definitely some platforms to watch out there, such as Bondora, Lending Club and Auxmoney which are all doing very interesting things.

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