The History of Peer to Peer (‘P2P’) Lending

The P2P lending industry was pioneered by Zopa, a British P2P lending company focused on unsecured consumer lending. Whilst Zopa launched in 2005, the P2P market started to experience significant growth from 2010 onwards when Funding Circle (unsecured business lending) and RateSetter (unsecured personal lending) joined the market.

Fast-forward almost another decade and there are now more than 50 peer-to-peer lenders operating in the UK market across the consumer lending, business lending and property lending sectors of the market. Total lending has risen to £4.7 billion in FY17.

Whilst the big three platforms (Funding Circle, Zopa and RateSetter) focus on unsecured consumer/business loans, a number of platforms now offer secured lending (i.e. asset-backed loans where the lender can seize property in the case of borrower default).

Source: Cambridge University, The 5th UK Alternative Finance Industry Report

What has driven the growth in P2P lending?

The three key drivers behind the growth in peer-to-peer lending are:

Low interest rate environment

In order to stimulate the economy, the Bank of England (BoE) dropped its base rate from 5.5% in December 2006, down to as low as 0.25% ten years later in December 2016. The rate has since marginally increased and currently sits at 0.75%.

Source: Bank of England data

The base rate is important because it influences spending levels and inflation.

Where interest rates are low, it becomes cheaper for individuals/businesses to borrow money, but it becomes less rewarding to save.

Following the financial crisis in 2008, both consumers and businesses reduced their spending levels, which meant the BoE had to cut interest rates to boost spending in order to save jobs. There has been a continuing for the BoE to keep rates low as the global economy continued its recovery.

However, the current expectation is that upwards pricing pressure over the next few years will require a need to raise the base rate further, with increases expected to be low and gradual.

Lack of lending appetite from mainstream banks

However, at the same time as the BoE dropped its interest rates, there was a clear reduction in lending appetite shown from mainstream banks.

This reduction in lending appetite was driven by a shortage of capital alongside tighter capital requirements imposed on banking institutions. These changes resulted in banks tightening lending criteria and raising their interest rate margins making loans more costly to businesses.

Technological advancement

A study of internet users conducted by the Office of National Statistics (‘ONS’) in 2019 found that virtually all UK adults aged 16-44 were recent internet users (99%). A further study by the ONS focused on internet access showed that internet banking activity amongst UK individuals has increased from 35% in 2008 to 69% in 2018.

These statistics depict a UK population which has embraced the Internet age with open arms. People shop with Amazon, book taxis via Uber, connect with friends via social media platforms and are now increasingly looking for alternative innovative ways to bank/invest their funds.

With low interest rates offered via traditional high-street banks largely seen as unattractive, investors have sought alternative investment offerings such as peer-to-peer lending which offer the potential of higher returns.

Similarly, borrowers have become more aware of alternatives to high-street banks and are seeking lower interest rates and quicker lending decisions.

Generally, it is widely believed that the growth in peer-to-peer lending platforms has been facilitated by general technological advancement and increased trust in online enterprises.

Summary

These three conditions combined created the perfect conditions for peer-to-peer lending firms to flourish.  Peer-to-peer lending undoubtedly works best when both investors and borrowers benefit:

  • Investors are seduced by potential higher returns at a time when low BoE base rates result in meagre returns from FSCS protected savings accounts
  • Borrowers are attracted by the availability of credit and potentially lower interest rates at a time when banks are hesitant to lend
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