Peer-to-peer lenders are a disruptive and increasingly powerful presence in finance. This disruption also means great challenges.
Across the Atlantic, news broke earlier this week that Renauld Laplanche, CEO of US alternative lending giant Lending Club, had been forced to resign. Industry experts have suggested the fall-out could have catastrophic consequences for high-growth businesses in this sector.
“It is clear this is bad news not just for Lending Club, but for our entire industry”, lamented Peter Renton, co-founder of Lendit. Cormac Leech, director of alternative finance at Liberum investment bank, warned: “valuations are going to come down massively. We can be pretty sure that the rest of the industry will feel it”.
But what’s all the fuss about? And what does our peer-to-peer data say?
The regulation issue
Unlike banks, lending platforms are particularly vulnerable to the credit cycle. Laplanche’s departure was prompted, at least in part, by an instance where Lending Club was forced to buy back $22m of loans from an investor that broke the specified terms.
But there are other dangers too. Back in October, co-founder of peer-to-peer platform Crowdstacker Karteek Pate warned of a “house of cards” situation within the industry, whereby ‘platforms may be tempted to lose their due diligence discipline and take on bad borrowers, in a bid to sound attractive to would-be lenders’. Of course, bad debt is bad debt; and when times get tough, people who are allowed to borrow when money is easy may renege on their loans.
“We’ve long been warning the next financial scandal will emerge from the platform sector” says Bill Blain, strategist at Mint Partner. He warned “It could [now] be regulated to the point of non viability overnight”.
How could this affect the UK’s Peer-to-Peer market?
The UK’s peer-to-peer market is still relatively young. Similarly to the ‘crowd’ prefix, ‘peer-to-peer’ has been appropriated by other sectors, where the business model is more closely aligned with the sharing economy.
Looking solely at peer-to-peer lending platforms, however, we see a healthy market. We’ve seen over £384m invested into peer-to-peer lending platforms, with companies in the space achieving, on average, a £34.6m valuation.
One of the UK’s few unicorns, Funding Circle is testament to the viability of the space. Headed up by Samir Desai, the company has raised over £191m equity investment and recently partnered with Deutsche Bank to make securities available through its platform.
While some feel impending regulations could cripple the peer-to-peer lending sector, others believe they will galvanise the space.
“I would expect platforms will be required to boost their financial and audit control functions” says Cormac Leech, adding: “platforms will tighten up disclosure controls and their best practices because of this”.
It seems short term volatility could give way to long term stability, as the peer-to-peer marketplace lending sector matures.