Figure 1: The Combined Market Share of the Big Four UK Platforms
The combined market share of these platforms was 100% until late 2010. As one might expect in a nascent market, with constant innovation and many new entrants, this share was then eroded as new platforms launched and grew. Some of these new platforms have targeted specific niche lending markets, such as the property lending specialists Wellesley, LendInvest and Assetz Capital. Others have introduced new peer to peer models altogether. Lending Works offers an insurance element to its model – affording additional protection to its lenders. The addition of new platforms inevitably adds competition and erodes market share from the top four platforms, an essential development in the creation of dynamic and responsive markets that best serve their customers.
From the chart it can be seen that the market share of the big four platforms reached a low in June of this year at just below 58%. However, the market share has rebounded from this inflection point in June 2014 and is now sitting just above 72%. It’s hard to be certain as to why this is the case, but it could come down to some combination of these factors:
2014 has seen the larger platforms form strategic partnerships with other financial service providers. For example: Funding Circle engaged in a
including ones with
and PWC; Market Invoice announced partnerships with
and
; Ratesetter became the first platform in the world to achieve a
from research agency FE; and Zopa announced a commercial agreement with
.
Regulation is considered a barrier to entry in many markets and, if significant, is capable of deterring competition. From April 2014, all platforms were required by the FCA to gain interim permission as regulation is phased in. The timing of the introduction of regulation and the boost in market share for the more established platforms coincides. It could be an indication of regulation acting as an obstacle for aspiring and startup platforms.
Institutional Investors are beginning to deploy capital in the P2P sector. This is a relatively new phenomenon in the UK. The
, a £200m investment vehicle, in June of this year and deals like
Funding Circle’s recent investment from KLS
just this month underline the institutional interest. As a result, institutional investors now account for over
30% of monthly volumes on the Funding Circle platform
. Institutional investors typically require scale and track record from a platform, amongst other attributes. This could be giving the more established platforms an edge when it comes to attracting the institutions and may be further widening the gap between the big platforms and the upstarts.
So is the dominance of the big players in the UK P2P lending space unique? If we look across the pond, there are only three platforms in the US that together have cumulative lending volumes over $1bn. These three platforms account for over 90% of the market in the US. The ability of these large platforms to generate a healthy pipeline of borrowers inevitably attracts institutional investors wishing to lend on a large scale. In the US over 80% of loans originated on Lending Club and Prosper are funded via institutional capital.
How do the smaller platforms compete? We’re already seeing innovative new products such as Lending Work’s insurance backed returns. New platforms also tend to specialise in niche areas, at least initially. It is also likely that we will see some platforms merge over the next 12 months, giving themselves economies of scale and the market presence to attract institutional capital and also quality borrowers. But given the recent re-bound in the market share of the big 4 it seems that, for now at least, the established names have turned the tide on the young pretenders.
