Peer-to-peer (P2P) lending is more likely to increase competition within the UK lending markets, rather than to distort competition, according to a study of the Peer-to-Peer Finance Association (P2PFA) conducted by economic consulting firm Oxera and published on Monday.
P2P lending, with its liquidity, risk and return characteristics not easily available to investors elsewhere, allows for increased competition and choice for borrowers. Although many offer additional services, P2P lending platforms’ main activity is the provision of financing to borrowers, much like banks do, and can be considered direct competitors of the banking sector. Compared to banks, however, non-bank lenders (P2P lending platforms included) are much more flexible than traditional lenders in introducing changes more quickly and at lower cost.
“P2P lending has been a real innovation in the market for credit, bringing benefits to both borrowers and investors. The existing regulatory regime in the UK has been successful in enabling the P2P market to develop to where it is today,” said Reinder van Dijk from Oxera. “As the sector continues to mature, regulation will need to evolve alongside it to ensure consumers continue to achieve the benefits made possible by this new model,” he added.
New P2P loans accounted for 0.8% of the total consumer and small business loans provided in 2015, according to the filing. The study analyzed the risks, costs and benefits of P2P lending and focused on the eight platforms which comprise the membership of the P2PFA – Funding Circle, ThinCats, RateSetter, Lending Works, Zopa, MarketInvoice, Landbay, and LendInvest.
According to the study, return on investments from P2P lending is broadly consistent with the typical yields of BB and B rated corporate bonds. In 2013-2016, the spread between borrower and lender rates on return was relatively stable at around 4% for business and consumer lending. Loan origination fees are also comparable to the issuance fees of investment banks issuing corporate bonds, although fees vary considerably across platforms.
On P2P lending risks
Overall, P2P lending poses little risk to the wider financial system due to its small size and the fact that investors look at P2P platforms as a source for long-term investments. The study also indicated that the credit risk assessments of P2P lending platforms are in line with those used by traditional lenders, and these produce similar outcomes in terms of losses due to default.
Moreover, most platforms provide secondary markets so that investors can exit early if there is another investor willing to take on the loan. However, relatively low usage of secondary markets suggests investors treat P2P lending as a long-term investment.
The UK P2P lending market has developed organically over time with diversity of business models. Platforms seek different types of investor (in terms of the size of their investment and their preferences) and different types of loan (e.g. consumer, business, invoice financing, property).
P2P lending is regulated in the UK by the Financial Conduct Authority (FCA) since April 2014. To see some of the leading UK market participants, follow this link.
The full report can be view here.