The meteoric rise of peer to peer (p2p) lending in the past decade has so far challenged conventional ideas of investment strategy. For centuries, banks have dominated the sphere of financing individuals and businesses; however, the financial crash of 2008 saw this age-old trust dwindle. From the rubble of this crisis, p2p investment firms offering alternative means of financing have taken the market by storm. Between 2013 and 2015, the stock value of p2p loans multiplied fourfold in the UK to a whopping £2.6bn. This rapid growth was mirrored in the Americas, with p2p stock value multiplying ninefold to a staggering $29bn.

The accessible format of p2p investment has no doubt contributed to its popularity. A platform creates a purchasable loan which an investor will buy in return for revenue from interest and repayments of original capital. The money spent to purchase the loan is then given to a borrower requiring the loan. With investors aiming for annual returns of 4% or more, as The Economist estimates, and borrowers enjoying relaxed oversight from the service provider, this system has so far proved to be mutually beneficial. Proplend, a popular p2p lending platform, has enjoyed returns from charging its investors a fee equal to 10% of interest earned.

The user-friendliness of p2p investment platforms has recently come under scrutiny. New regulation from the Financial Conduct Authority (FCA) targeting the asymmetry in knowledge, primarily between retail investors and platforms from which the loan is purchased, threatens a hallmark feature of p2p lending - the lack of red tape. Christopher Woolard, the Executive Director of Strategy and Competition at the FCA, comments that the regulation is about ‘enhancing protection for investors while allowing them to take up innovative investment opportunities’. A key cornerstone of this regulation, which was implemented in the UK on December 9th, requires firms to assess investors’ knowledge of how p2p lending works to screen out those likely to suffer an undue loss. This regulation follows the collapse of UK p2p platform Lendy, which fell into administration following excessive losses incurred by investors.

The steep rise in competition has also cast doubt on the financial longevity of the p2p system. Fintech companies including Afterpay and Affirm have begun offering instalment loans to customers at checkout in a bid to diversify revenue sources. Barclays, a global bank, has also invested heavily in Fintech throughout 2019. Managing Director of Group Innovation at Barclays, Mariquit Corcoran, comments ‘the rate at which fintechs and banks are working together is continuing to accelerate’. With the forecasted success of fintech and clamp down in regulation, one must wonder if p2p lending shall remain a competitive mode of investment in the coming years.

Brighton Dube

P2P Lending: An Uncertain Future