There are plenty of barriers to aggregation in marketplace lending. Perhaps the most insurmountable of those is that the platforms themselves are broadly opposed to the idea of reintermediation. The value of peer-to-peer (true peer-to-peer, I should say) lies primarily in connectivity. Investors are plugged directly into borrowers via a digital intermediary, and generally speaking have clarity over who those borrowers are. There are a large number of “P2P” models that do not fit this definition, but let’s stick to “pure” peer-to-peer lending for now. The point is that reintermediation comes at a price, and it’s a price that the platforms are generally reticent to bring to bear upon their customers.
But for investment aggregators/supermarkets/portals (whatever you want to call them), there is perhaps a bigger challenge. There are a large number of one-stop-shop solutions for marketplace lending in the UK and indeed globally – each of them similarly nascent, each of them vying to become the go-to for retail and/or institutional investors in the space.
The problem that these sorts of companies must overcome in order to succeed relates to the sheer variety of underlying assets involved in marketplace lending. There are platforms for consumer loans, platforms for secured and unsecured SME loans, for development loans, for buy-to-let mortgages, for unpaid invoices, and so on. Comparing risk and reward across so broad a spectrum is like trying to compare the quality of the component parts of a fruit salad. Further complicating the concoction is the enormous variation between the platforms themselves in risk appetite, credit processes, average term, debt collection procedures, etc. How can we be sure, in so complicated a web of instruments, that a Funding Circle “B” loan, for example, looks anything at all like a Funding Knight “B” loan. We can’t. There is little to no alignment between the credit processes of the many different platforms. As such, it’s immensely difficult for access portals to price marketplace lending assets – and, therefore, to funnel investor money into those assets.
In the bond markets, investment instruments are compared to one another on a like-for-like basis. For now, no such comparison can take place within the world of P2P. The incomparability of assets is one part of the problem. The other is the lack of an established benchmark for performance. That is not to say, however, that there are no contenders – see, for example, the Liberum AltFi Returns Index (LARI) – rather that the race for “de facto” status is still on. The LARI is, to my knowledge, the only loss-adjusted representation of the historic return delivered by the UK peer-to-peer lending sector’s leading platforms. Were the LARI to become the go-to point of comparison for peer-to-peer lenders – as arguably it should – then we’ve solved the benchmarking part of the problem. But the ability to compare assets across a number of platforms, for the time being, continues to elude us.
The task of cross-platform comparison is further complicated by the fact that Zopa is the only platform within the peer-to-peer lending space to have weathered an economic crisis. Bearing that in mind, what level of certainty, if any, can we really have about a platform’s ability to price risk? We can see how they’ve fared to date, but how they’d perform in a downturn is the stuff of guesswork. John Mould, CEO of secured business lender ThinCats, offered his thoughts on the matter:
“We all look back at 2008 being a bad recession and in many ways it was… But not as concerns insolvency rates. Insolvency rates did not increase much at all. This was probably due to quantitative easing and the drop in interest rates to virtually zero."
"In fact the total business insolvency rates were lower in 2008 than they were for the previous three decades. Therefore to say that the peer-to-peer sector has in any way weathered a default storm is probably not valid. A real test would be whether the peer-to-peer sector (and indeed many sectors both old and new) could manage to weather the insolvency storm of the 1990s. The peer-to-peer platforms that understand this are the ones that will be best able to insulate their customers against any insolvency shocks.”
An essential ingredient in the construction of a solution to these problems is time. It takes time for performance data to accumulate. The deeper the historical data set, the easier it becomes for the aggregator to account and adjust for the differences between assets.
In spite of these complications, it’s not all doom and gloom for the access portals. Complication creates opportunity. The opportunity in this case is for aggregation-based investment solutions to in some way bring the many credit models within marketplace lending into line, thus providing investors with a composite view of the asset class, and of its performance. Such a solution will bring true value to the industry – value that is worthy of re-intermediation.