Is Peer-to-Peer Lending A Social Trend?
Many view social lending as a popular trend. In the UK, peer-to-peer lending has seen massive growth. However, calling it a social trend would not be accurate.
Going by the dictionary definition a social trend is something that lasts from 2 to 5 years. Before 2015 any indulgence in the P2P industry could be said as an indulgence in a popular trend. Before 2015 peer-to-peer lending was considered an “alternative finance” industry. However, the data at the end of 2015 shows that peer-to-peer lending is now a mature, established industry and is actually on its way to moving from an “alternative” source of finance to a mainstream source of finance.
The borrowers
At first, peer-to-peer lending started with people seeking personal loans without going through the hassle of dealing with a traditional bank, and investors looking for better rates for their savings. Peer-to-peer lending has now evolved into being the first choice of investment and borrowing for many.
Peer-to-peer lending is now also providing business loans and real estate loans. In 2015 peer-to-peer business lending for real estate grew to over £600m. This equated to 41% of the overall P2P business loans.
SMEs (Small and Medium sized enterprises) borrowing has long been a performance indicator of how healthy the economy is. The more funds SMEs are able to borrow, the healthier the economy (SMEs are usually more labour intensive and have potential for growth). The SMEs have been very well facilitated by peer-to-peer loans. P2P lending has supplied the equivalent of 13.9% of new bank loans to small businesses in the UK in 2015.
Interestingly, the most funded regions in the UK peer-to-peer market for SMEs were:
- East Midlands
- London
- South East
It may come as a surprise that the Midlands received the most SME funding, but this is because manufacturing comprises the majority of this region’s economy, and Manufacturing and Engineering received the most peer-to-peer business funding after real estate.
The investors and the platforms
Success of peer-to-peer lending can be judged by the fact that investors are also growing year by year. The number of investors reflects some form of stability in the industry, but then again it could be this ‘social trend’ prompting novices to invest? This is a concern in the industry, but not enough to dampen the millions of pounds that continue to be lent, and as long as default rates remain low and security measures robust, hopefully, the industry continues on this trajectory. Caution and a watchful eye is very much advised, however.
Institutional funding
What’s more interesting than the growing number of investors is the investment of institutional funders (banks and investment houses) into peer-to-peer lending platforms. This shows that peer-to-peer lending is here to stay. Banks have been around for hundreds of years, but even they are being forced to recognise peer-to-peer lending platforms as an effective vehicle for their investment.
In 2013, 11% of all platforms reported having institutional funding. By the end of 2015 nearly 45% of the peer-to-peer lending platforms reported that they had some level of institutional funding. And institutional investment into peer-to-peer lending has not peaked. It is a rising trend. In 2015 out of all peer-to-peer lending personal loans given, 32% were backed by institutional finance.
This begs the question: is peer-to-peer lending, ironically, going out of fashion? Is ‘marketplace lending’ the new keyword? P2P runs the risk of losing its vibrancy and social impact by allowing for institutional cash, but it adds a level of liquidity to the industry; important and necessary.
The regulators
Trends come and go. A good indicator of the importance of peer-to-peer lending is the notice taken by governments. Both the USA and the UK governments have taken notice of the peer-to-peer lending industry and passed regulations to safeguard investors and facilitate borrowers.
The UK government has been especially encouraging. The FCA (Financial Conduct Authority) introduced regulations in 2014. These regulations will come into full effect in 2017.
Most platforms welcomed these regulations and were of the opinion that they were effective at protecting the interests of all the parties involved.
Also to encourage the peer-to-peer lending industry growth the government is introducing the Innovative Finance ISA (IFISA) from 6th April 2016. Thanks to this a peer-to-peer investor will be able to gain tax exempt interest from their investments.
Conclusion
Peer-to-peer lending has evolved from a popular trend. It is a growing industry and its here to stay. The industry is not just growing in size, it is also diversifying and becoming more inclusive and complex. What started as a social platform facilitating peer-to-peer lending for personal loans has grown into an industry facilitating loans real estate investment and development and business ventures.
What is extremely important to take note of, from an investor’s perspective, is the infancy of this industry. Default rates may be extremely low, around 1–2% industry average, but there’s not been many loan life-cycles in peer-to-peer lending’s 10 year existence.
Will we see defaults rise? Certainly. Is it a concern? Possibly. Should investors be worried? Not necessarily, it is an investor’s responsibility to assess risk, but the peer-to-peer platform’s duty to present all the facts and measures put in place to mitigate risk.
As an investor you can assess risk by comparing UK peer-to-peer lenders and their security procedures here.
