What holds back the French crowdlending market?

By Jean-Damien Foata on 20th July 2017

P2P/Marketplace Lending

French crowdlending has been developing but its growth is sluggish. The sector has grown 46 per cent in 2016 with 96 million euros of loans granted (1).  But this will not be enough to catch up to Britain and its 13 billion euros in cumulative loans disbursed (2). How can we explain such a gap between these two close neighbours?

What holds back the French crowdlending market?

The reason? This is may be a micro-economic problem. Crowdlending platforms must achieve a tough balance between two opposing interests. On the one hand, there are the lenders looking for high interest rates. On the other there are the corporate borrowers seeking low cost finance. This relationship is easily summarized in the following picture:

Finding this equilibrium seems simple in the UK but appears to be an almost unsolvable challenge in France as we can see from the following two graphs covering the 2008-2015 period.

The competitiveness of French banks

In France, bank borrowing rates for SMEs are comparatively low. According to the last detailed report of the OECD in 2015, these rates were 1.8 per cent in France versus 3.3 per cent in the UK (3). Furthermore, in France banks demand relatively fewer guarantees than in the UK. According to the same study the percentage of SMEs which needed collateral to obtain bank credit was 6.3 per cent in France versus 44.2 per cent on the other side of the channel. As a result, in 2016, bank borrowing was the go-to source of funding for SMEs in France while it was only the fourth most popular source of funding in the UK (4).

Because of this, French crowdlending faces fierce banking competition. French crowdlending platforms certainly don’t lack in means when it comes to attracting investors, however bank rates leave them limited room to manoeuvre. If these platforms want to attract low-risk loan files, they can hardly ask for more than 3 per cent above the rate charged by the banks. The more they go above that limit, the more they expose themselves to the risk of default.

On the contrary, in the UK the banking competition is less fierce. Interest rates are relatively high and the conditions for accessing a loan are restrictive, putting British crowdfunding platforms in a strong position. Due to these factors, they can easily attract very low-risk companies offering interest rates 4 per cent above bank rates.

A French tax system that drives up rates

The problem becomes a tricky one when we have a look at the lenders' requirements. Since the rates for a risk-free investment (government bond rates) are similar in France and the UK (5), the requirements for return should be the same on both sides of the channel. Unfortunately, this is simply not the case.

In the UK, certain tax schemes allow for the exemption of income from crowdlending investments. In France, social tax and income tax apply to income from investments in crowdlending. As a result of these policies, French lenders automatically have higher expectations regarding profit than British lenders.

Prominent default rates in France

To satisfy the increased requirements of French lenders, French platforms must find companies which accept higher loan rates. Companies that agree with these conditions are by nature riskier. As a result, payment default rates increase enormously on certain French platforms while those rates remain reasonable in the UK.  AltFi Data thus considers that only 1.2 per cent of peer to peer loans are “bad” in the UK (6). In France, according to the consumers’ association “UFC Que choisir”, some crowdlending platforms reach a default rate of 10 per cent after only 3 years of existence (7). This impacts the performance of French platforms and in the long term could dissuade investors from investing in crowdlending.

The solution: the inventiveness of entrepreneurs

Some might just wait for an increase of the ECB key rate or for tax cuts to find a way out of this unfavorable situation for French crowdlending. However, that is not the case for all crowdlending entrepreneurs, with some of them developing original models to overcome the constraints of the French market. Lendix attracts quality projects by putting forward its capacity to collect significant amounts of money in record time. Lendosphère attracts lenders despite smaller rates thanks to projects around energy transition that go beyond just the financial aspect.

This list of examples is far from exhaustive, but it shows that French crowdlending entrepreneurs know how to adapt to their market and how to generate growth in their sector. This two-digit growth in a rather unfavorable context will more than likely lead to substantial growth as soon as banking rates increase and as soon as taxation rules are adapted.

Formulas shown on the graph:

  1. Statistical information taken from OECD Statistics
  2. Minimum rate required by French lenders for an expected default rate of 2% = (Risk-free rate + 2% – 2%*(15.5%+24%)) / (1-15.5%-24%)

With a view to simplification, 2016 tax structure was applied for the whole-time span even though it has changed.

  1. Minimum rate required by British lenders for an expected default rate of 2% = Risk-free rate +2%

With a view to simplification, 2016 tax structure was applied for the whole-time span even though it has changed.

Sources:

1. Baromètre du crowdlending 2017

2. Altfi UK Analytics

3. OECD Financing SMEs and Entrepreneurs

4. European Commission - Access to finance for SMEs

5. OECD Statistics

6. Altfi UK Analytics

7. UFC Que Choisir - Les placements participatifs : des placements risqués au potentiel moindre que le livret A?

Comments

AltFi Toronto Summit 2019

AltFi is coming back to Toronto following on from a highly successful event last year. We'll again be bringing a high profile international showcase of speakers from the leading fintech and alternative finance leaders.

9th October 2019