Chris Foster

Financial resilience part 2: Peer-to-peer lenders

Chris Foster

This article was first published by Alliance Trust Investments on 19 February 2016.

The financial crisis, low interest rates, high credit card fees, lack of trust - all an influence on the rise of peer-to-peer lending. The second of our four part series on financial resilience explores this relatively new market and considers some of the investment possibilities.

Introduction

The 2008 financial crisis has left consumers wary of the ‘big banks’ and trust in financial services as an industry is remarkably low (1).  Annual Percentage Rates, or APR, of credit cards has fluctuated between 12 and 16% since 2005 (2).

Credit Card Interest Rates Over Time

At the same time, you’ll be hard pushed to find cash ISA that pays above 2.6% (3). Cue internet based companies matching borrowers with investors, marrying the respective risk and maturity characteristics. Peer-to-peer (P2P) lending are online marketplaces with complex algorithms that match borrowers with investors (4).

How peer-to-peer lending works

Neil Bindoff of PwC speaks of a “perfect storm” supporting P2P’s growth. His reasoning is the following: “Interest rates are close to zero, the public is fed up with banks, costs are low (one third of a typical bank’s, according to Renaud Laplanche of Lending Club), and e-commerce is becoming part of daily life. People use the internet for peer-to-peer telephony (Skype) and shopping (eBay), so why not loans?” (5).  As you can see below, P2P lenders offer a gradual scale of rates based on incremental increases in the perceived riskiness of the borrower (6).

Market Potential

By lending money directly to individuals seeking a loan, both lender and borrower reap the benefit of a streamlined, online matching process. For the latter, this translates into a personal loan at a competitive APR, while the former enjoys returns typically in excess of 5 per cent. Compared with the low rates currently being offered by banks on savings accounts, the clamour which has seen the P2P industry breach the £3 billion mark comes as little surprise (7).

Lending Club, the world’s largest P2P lender (8)  experienced loan growth of 92% in 3Q 2015 vs. 3Q 2014.

Potential Winners

This is a relatively new space and as a result, many of the established players are still not publicly listed and so are not eligible for investment in the SF funds. As well as the obvious benefits to Peer-to-Peer Lending there are a number of associated risks, such as what might happen in a recession, and what will the regulatory landscape look like for such companies in a couple of years? Our current exposure is via an investment in P2P Global Investments – a closed ended fund that selectively invests through well known P2P lenders such as Zopa and Lending Club in consumer and SME loans.

Sources

1 Mind the Gap: Restoring Consumer Trust in Financial Services: Page 6 http://www.fscs.org.uk/globalassets/press-releases/20151111-fscs-trust-white-paper-final.pdf
2 http://www.valuepenguin.com/average-credit-card-interest-rates
3 Top Cash ISAs 2015/16 http://www.moneysavingexpert.com/savings/best-cash-isa
4 http://www.techinsider.io/peer-to-peer-lending-how-digital-lending-marketplaces-are-disrupting-the-predominant-banking-model-2015-05
5 http://www.economist.com/news/finance-and-economics/21597932-offering-both-borrowers-and-lenders-better-deal-websites-put-two
6 https://www.lendingclub.com/public/steady-returns.action
7 Lending Club Q3 2015 presentation http://ir.lendingclub.com/calendar.aspx?iid=4213397
8 https://www.lendingclub.com/

 

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Friday, February 19, 2016, 12:00 AM