THE PEER-TO-PEER finance industry could be on its way to becoming a polarised market, where the biggest firms stick to their core P2P lending activities and the rest are forced to evolve into hybrid models.
A wide range of industry onlookers have told Peer2Peer Finance News that it will be impossible for smaller firms to achieve profitability without either expanding into balance sheet lending, merging with direct lenders or morphing into a business model closer to that of a collective investment scheme.
“It’s incredibly difficult to build a straightforward P2P business to the size where it becomes profitable,” said Andy Davis, author of a report that pointed to hybrid models as an inevitable evolution in the sector.
“It’s intrinsically more profitable to arrange and lend rather than only arrange. We’re going to start seeing hybrid loans emerge.”
P2P is ultimately just a subset of direct non-bank lending, he argued, but with different technology in place and different market access. When a direct lender sets up a P2P platform, its return on capital goes up exponentially and it can immediately recycle those returns to originate more lending.
“Hybrid lending from some providers will increasingly be the chosen solution. This is not an issue or a problem for investors in and of itself, ” added 4th Way analyst Neil Faulkner.
While the early adopters “had huge enthusiasm and were emotionally invested in the idea of P2P,” the notion of matching investors and borrowers is no longer a key selling point, according to Conrad Ford, founder and chief executive of business finance aggregator Funding Options.
“The borrowers don’t really care where the money comes from,” he said.
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Such blunt statements run counter to the current perception of balance sheet lending as a hurdle to gaining regulatory authorisation, but Davis and Faulkner seem to agree that this is not the case.
“Evidence so far is that mixed structures with a direct lending arm and a P2P lending platform have obtained authorisation very quickly,” said Davis.
The Financial Conduct Authority does not specifically outlaw direct lenders creating a P2P offshoot, as long as they set up separate structures, guarantee a degree of risk sharing and most importantly, a high level of transparency, he said.
“What is absolutely critical is that any changes to the risks that this brings are explained clearly to investors,” said Faulkner.
So in the next phase of the P2P market’s coming of age, hybrid lending and consolidation could become the norm for most players.
But for the largest platforms, which have reached an impressive level of scale in a relatively short time period, it is a different story.
Zopa – which is planning to launch a separate banking arm – is seen as an exception to the rule, with insiders predicting that most of the largest firms will stick to their core P2P lending activities.
RateSetter does not think that it is necessary for platforms to shift into hybrid models.
“We are of the view that our own model is scalable and sustainable,” a spokesperson said, citing the fact that the platform was profitable in the financial years ended 2014 and 2015.
Funding Circle has indicated that it is not interested in launching a bank.
“It is clear that the ones that manage to gain scale [as straightforward P2P platforms] then become perfectly profitable, and that’s where the leaders are going,” said Faulkner.
Despite industry forecasts, smaller players are not necessarily convinced.
“I think the argument about hybrid models is complete rubbish,” said Lee Birkett, founder and chief executive of Cheshire-based lender JustUs.
“There’s no such thing as a hybrid model. You’re either a bank or a P2P platform.”