Peer to Business Lending
Alternative Finance Sector Report - October 2014 33
PEER TO BUSINESS LENDING
ALTERNATIVE FINANCE SECTOR REPORT
PUBLISHED
November 14
AUTHOR
Luke Jackson
Samantha Goins
ALTFI
AltFi.com is an excellent resource of information, data, analysis and opinions on the alternative finance sector. They aim to
reflect and report on the rapid changes within the alternative finance sector, providing everyone involved in this exciting and
fast growing space a unique insight into the very latest developments through regular news and analysis.
NEW ENTRANTS AND RISKS
With the continued growth in the P2B
lending market there are likely to be a
number of new platform launches over
the coming months and years. This of
course is beneficial for the sector and will
help to increase competition, improve
efficiency and increase the number of
avenues for investors and borrowers to
participate in. Ultimately, as long as the
sector continues to grow and evolve, and
as new innovative platforms are formed,
it will increase the impact that alternative
finance will have on traditional bank led
lending and the likelihood that this sector
can seriously challenge the status quo.
A flood of new entrants into the market
could, though, have a number of
downsides which need to be carefully
considered. The sector is currently
growing at a phenomenal rate, which
itself will attract new entrants, but it is
the quality of new entrants which should
be under scrutiny. Some companies may
simply enter the P2B market to jump on
the bandwagon – they may have good
intentions, but may not have the skills
or experience to successfully manage
a platform. In their haste to enter the
sector, which is currently dominated
by a few well known and established
platforms, there is also the risk that
new platforms will take bigger risks,
undertake less due diligence or simply
accept higher risk loans at lower interest
rates. There is the potential for quantity,
not quality. This could result in a higher
risk of default, but investors may not be
being adequately compensated for these
higher risks.
Of course all platforms must be regulated
by the FCA, but in truth the FCA is still
finding its feet in this market place, and
has no real control over the types of
loans offered or the amount people can
invest. As long as firms meet minimum
client money, administration and capital
requirements, they will be relatively free
to operate in the sector at will.
Ultimately a number of new platforms
and growth in the sector will go hand in
hand. As more investment opportunities
come about, there is of course more risk
that a platform will fail, or that default
rates on loans could rise, particularly
in poor economic conditions. As long
as platforms have adhered to FCA
regulations and the correct processes
are in place to deal with a platform
failure then investors should not be
subjected to unnecessary risk. The
main disadvantage of a platform failure
would be to the reputation of the sector
– investors would no doubt perceive
P2B to be inherently more risky, and
may shy away from the sector or look
to immediately offload their existing
loans. This could stunt the growth of
the sector, but would more likely be a
speed bump rather than an outright
stop sign. On the other hand, a platform
failure could present the opportunity
for another platform (new or existing) to
take on the ongoing administration of
the outstanding loan book or grow their
customer base.
With more new entrants and more choice
for borrowers and lenders, platforms
will have to become more efficient at
both ends. They will need to increase
their pipeline of opportunities, and be
more aggressive in their marketing and
client retention. Efficiency is usually seen
as positive for a sector, as it improves
processes, cuts costs and often results
in better product offerings. But there
is the risk that platforms will be forced
to become too efficient. Smaller
platforms may struggle to offer low fees
to borrowers whilst also offering high
returns to investors, and their charges
may have to reduce. This will result in
lower revenues for platforms and may
mean they have to cut back on certain
services or due diligence for example.
This could increase the risk of platform
failures.
A further risk is the threat of institutional
or bank funded platforms entering the
sector, with access to their existing
customer base and huge marketing
budgets – they could drive out smaller
platforms and lend through their
platform themselves. A number of
platforms already have backing from
institutional investors, but it is unclear
how much influence they have on
the activities undertaken at the front
end. LendInvest and Assetz Capital
for example are implementing new
technology onto their platform to
make investment easier for institutional
investors.
