What to watch out for in online lending in 2018
Will the regulator impose new rules on P2P lenders?
It’s that time of year once more when industry news sites teem with forecasts and reflections fit to overwhelm an oracle. Not to be left out, we at AltFi have put together our own series of articles looking ahead to 2018, to be published throughout this (otherwise quiet) week. In this piece, I peer into the future of the UK’s online lenders, which have not had it easy in 2017. Will 2018 prove plainer sailing?
The FCA review
Much has been written about the FCA’s planned review of its crowdfunding regime, which has been going on since the summer of 2016. Its conclusions ought to have been published earlier this year, but after initially being delayed by the snap election, still nothing seems to have materialised. At the tail end of last year we learned that the regulator was planning new rules for 2017. Though these did not come to pass, we must assume that they remain locked and loaded. We know, based on the FCA update in late 2016, that the new rules will involve strengthening investor protections and improving standards of disclosure, among other things. A hyperbolic story in The Times in August 2017 spoke of a planned “crackdown” on peer-to-peer lenders in the UK. In reality, this article seemed unwittingly to be recycling the six-months old stated intentions of the regulator. But hyperbole or not, new rules of some description for crowdfunding (including the loan-based variety) in 2018 seem inevitable.
2017 saw its fair share of mishaps, headlined by RateSetter’s wholesale lending/monitoring debacle (and subsequent recovery), and Wellesley & Co.’s struggles – which very broadly speaking relate to obfuscation (the platform remains closed to P2P investors). Expect these events to have a marked influence on any action taken by the regulator.
The Peer-to-Peer Finance Association, an influential voice in the UK’s P2P space, recently updated its operating principles. Headlining the update were “enhancements to bad debt and likely returns disclosures”, and a requirement that members undertake and publish assessments of platform resilience in stress scenarios. Although the these criteria are designed to supplement the statutory regulations of the FCA, independent chair Christine Farnish has said she believes it “would be helpful for the wider sector were some or all of these standards to be incorporated into the formal regulatory regime in due course”. Might the P2PFA’s operating principles offer some insight as to which direction the FCA’s rules are heading?
Performance trends to monitor
MarketInvoice recently made a splash about its performance metrics, including its 3-year net return of 30.2 per cent and its annualised net return for 2017 of 10 per cent, as calculated by AltFi Data. Impressive numbers, no doubt, but derived (as the platform’s head of investor development Aman Mehra admits) almost entirely from its core business of invoice finance. In November, MarketInvoice expanded into the business loans market. These unsecured loans will range from £10k-£100k in size over a 12-month term, and will specifically target startups. How will MarketInvoice fare in this untested and unquestionably risky arena? AltFi Data will be monitoring.
Another matter worth monitoring is the performance of the world’s original peer-to-peer lender Zopa. The platform, long-known for its prudent approach to risk management, was forced into repeated interest rate cuts following the impact of Brexit on its competitors (namely, high-street banks). In the context of worsening consumer credit conditions, Zopa then announced that it was expecting higher than expected loss rates in August 2017, while also lowering its return projections, and committing to cut back on its riskier loans. Zopa’s 1 year net return currently sits at 4.7 per cent (according to AltFi Data): a healthy enough number. But bearing in mind the repeated warnings from the Bank of England about a deteriorating outlook for consumer credit, the fact that Zopa has been closed to new investors for much of the year, and the delays that its customers have encountered when trying to sell-out of their investments, Zopa has its fair share of challenges ahead (as I have tried to articulate in greater detail here).
Sooner or later, promises of impending profitability must be kept. But for now profitability continues to elude the majority of major peer-to-peer firms. Assetz Capital (among others) has managed to buck the trend, reporting a “seven figure” pre-tax profit for the six months from April to September 2017, following on from a profitable 2016/17 financial year.
The big three, on the other hand, continue to lose money. After a tumultuous 2016/17, RateSetter reported a pre-tax loss for the year of £23.3m (including a £14m goodwill impairment relating to its monitoring mishap). Zopa’s operating loss was £5.9m across the same period, while Funding Circle’s came in at £35.7m.
All three have their reasons for continuing to lose cash hand over fist. Funding Circle is building a global business and has flagged its continued investment in “technology, marketing and staffing”. The larger part of RateSetter’s losses were as a direct result of its wholesale saga. Zopa, meanwhile, is mid-way through building a bank.
Is profitability realistically on the cards for any of these category-defining companies in the coming year? Well, if you believe RateSetter boss Rhydian Lewis…
“We will launch our ISA before the end of the tax year and expect to attract £500m within a year,” he said in early December. “We expect to return to profitability next year.”
Whether or not the biggest platforms can breathe life into what has so far proven an underwhelming Innovative Finance ISA market. To do that, they’ll need too…
. Having too much money to lend and not enough borrowers to lend to seems to be the chief cause of delays to the full launch of both Funding Circle and Zopa’s IFISAs.
Will we see further signs that the tech giants have finance squarely in their sights in the coming year? Amazon revealed in June that it has quietly lent
to businesses. Rumours surfaced only this week of
in Indian small business lending platform Capital Float.
that the e-commerce giant plans to "crush" the small business lending market; its progress with this plan is well-worth monitoring in the coming year.
Merry Christmas from all the team at AltFi!