On the cusp of the Brexit decision fear and uncertainty is in the air, volatility is high and safe haven assets are appreciating. This uncertainty has lead various market functions to slow, function abnormally and cease in some cases, businesses are holding off making big decisions until UK’s future is clear.
Buy what does this mean for the world of P2P lending?
Looking first to the top level ‘in-out’ decision; an out vote would prevent lending businesses authorised in the UK or another EU country to offer its services in any other EU country, this is officially called “Passporting”. This could cause a real headache for platforms such as Funding Circle who are really starting to develop their EU businesses, this would impact the ability for P2P lending markets to grow going forward.
Turning to the actual P2P market itself; there are both supply and demand factors at play. Not only may lenders stop lending, but borrowers stop borrowing.
Within the supply (lending) side of the equation, we have the institutional and non-institutional lenders, like myself.
Looking at the everyday non-institutional user of P2P lending platforms, they are the target lending audience and tend to be less confident and aware of the economic consequences of a Brexit. RateSetter stats for “UK consumers who say they understand P2P lending” place figures at only 42 per cent for men and 26 per cent for women. With the added pressure of Brexit uncertainty, it is no wonder that some may think twice about locking money into a lending platform for 3-5 years when the didn't fully understand it in the first place!
The far more disruptive group is the institutional lenders, these are more sophisticated in nature but have a tendency to act in a more flippant ‘risk on-risk off’ manner, similar to their stock market counterparts. Take for example the recent debacle with Prosper, the way some of its institutional lenders act can exacerbate the problem, in this case Blue Elephant stopping and starting its purchases is the effect I described before.
As institutional lending is now forming a decent chunk of marketplace activity I expect their seesawing effect further impacting volumes over the runup to Brexit:
Looking to the demand (or borrowing) side of the equation we see a more worrisome picture. A report by Capitalise recently stated “40% admitted Brexit has already impacted their business decisions” when talking to SMEs (Small Medium Enterprises). These businesses are less likely to make decisions which leads to taking out loans to expand the business or finance new operations, the uncertainty is financially paralysing.
Looking to a small snapshot of the markets themselves, seeking the aforementioned reflected in data, we see the following over at Ratesetter:
Since January 2016 there has been a noticeable decline in weekly market volume, naturally there are fluctuations within the marketplace. However this has been followed up by some weird market lending equilibriums:Since January 2016 there has been a noticeable decline in weekly market volume, naturally there are fluctuations within the marketplace. However this has been followed up by some weird market lending equilibriums:
There is a pretty obvious decline across the various products amidst the volatility, I would consider this potential evidence of Brexit’s negative effects in the P2P lending marketplace. As demand for loans falls (Individuals & SME’s not making financial decisions), the rates fall to encourage more to take out loans at a lower rate - forming a new lower equilibrium. Most noticeably bizarre is the 3 Year market, where rates plunged down to unseen levels before recovering once again to later repeat to a lesser extent. When I contacted Ratesetter, they cited bank holidays affecting volumes and effectively didn't know what was going on (or what to tell me) in the 3 year market. To me this was a totally unforeseen lack of demand for a product.
It's not clear from the surface exactly what Brexit has done to the P2P lending space; there are news articles covering the top level dialogue of how investment flows have slowed, but platforms themselves are understandably reluctant to paint a negative pictures. Readers should be aware that there are indeed other factors at play, such as the unexpected delay in the Innovative Finance ISA wrapper being available to retail investors, with platforms having to wait for full FCA authorisation before being able to offer it.
As an investor in the P2P lending space, I am personally looking to hold off any major relending until the Brexit decision has been made and counterparties stand on solid ground. Ironically, in tactically seeking to avoid the disruption here, I am further exacerbating the abnormal functioning of the P2P space. It is key that normal functioning of the lending markets resumes before an investor is to lock in interest rates for the next few years.
Marcus Williamson is a private investor in P2P/marketplace lending and runs a small private fund of alternative assets.