Marketplace lending: what we can learn from the UK

Antonio Lafiosca, co-founder and CEO at BorsadelCredito.it | November 24th, 2016

The trends for the future of marketplace lending are outlined in London, where it was born 10 years ago

It is worth about 85% of the European market, it keeps growing (+ 99% in 2015, when it moved 1,490  billion pounds) and, on the occasion of its 10th birthday, it is once again changing the rules of the game, evolving in complexity and diversity. We are talking about p2p lending in the UK, where it  saw the light for the first time. Even if international banks are ready to leave the UK for fear that Brexit will prevent them from selling services and products freely in the EU, and consequently the City is losing its role as European financial capital, UK p2p lending can still gain new space for itself. Indeed, shadow banking, that has no boundaries nor passport, is not in danger. While overall bank lending to business is losing its enamel, British p2p platforms are delivering more and more loans. Social lending to SMEs is 3% of total lending in Britain and rises to 13% if we look at micro-enterprises, those under a million pounds in revenue. In general, in 2015 British platforms financed 10,000 companies in fields other than real estate, with the average loan amounting to 76,280 pounds originating from 347 lenders, on average. And they have welcomed only 22.7% requests, in order to select only the most reliable borrowers.

Social lending is growing, not just in volume, but in terms of quality too, especially when speaking of diversification. New products are being included, such as car leasing, and other sectors are by now so important that they can be considered separately, like real estate, which is worth 600 million of the total 1.5 billion financed during the year. But in 2015 another important phenomenon has made its way: the increasingly massive activity of institutions, that have financed 32% of consumer loans and 26% of business loans. And this, we believe, is a sign that the market is mature.

All these numbers – and many more – can be found in the latest UK Alternative Finance Industry report by the Centre for Alternative Finance of Cambridge University and Nesta Foundation, in collaboration with KPMG.

Besides, this research analyses the p2p industry from the point of view of the lender: 42.3% of British lenders choose auto-bidding functionalities, which means they invest selecting one option among some regarding amount, duration and risk. The researchers say that “automatic bidding can enhance market efficiency, as both the lenders and SME borrowers know the applicable interest rate with a greater certainty.  Nevertheless, auto-bidding challenges peer-to-peer business lending platforms to constantly improve their own underwriting and credit risk management capabilities.” In addition to real estate, the most attractive sectors for UK investors are manufacturing and engineering, followed by transport, utilities and then finance and retail.

Compared to Italy, such a scenario is so futuristic that it could come from another planet. Since 2005, at least 90 different platforms were born in the UK. The four preeminent ones, that today share the largest slice of the market, in the near future may act as catalysts for the others: Zopa, Funding Circle, RateSetter, Marketinvoice. Each of them has a different business model from the others. The pioneer among them, not only in the UK but worldwide, is Zopa, which was started in 2005 and in 2015 had handled 1.79 billion pounds in personal loans, granted to 150,000 people from 53,000 lenders. Zone of possible agreement is the meaning of its name and the essence of its business. If Zopa is the leader in personal loans, Funding Circle, that made its debut in 2007, is the leader of small business loans: it has financed 20,000 SMEs in the UK, USA, Germany, Spain and the Netherlands, financing 2.5 billion pounds from over 55,000 lenders. Among these, the UK government, local authorities, a university and several financial organizations collecting an annual return of 7.4%.

RateSetter instead lends to both individuals and companies and to date has provided more than 1.5 billion pounds. On their website you can read that “no customer has ever lost a penny” though “past performance is not a guarantee of the future. However, it’s a track record we go out of our way to maintain.” The strength of this platform lies in its name: the interest rates are not fixed in advance but change daily basing on the encounter between supply and demand.

Last but not least, MarketInvoice has a different business model: it finances companies’ invoices that are usually paid between 30 and 120 days. Briefly, after verification of the company’s documents, which takes one working day, the platform anticipates up to 90% of the value of the payment. MarketInvoice has payed invoices for 975 million pounds and features the British Business Bank among its users.