P2P Guide

7 THE P2P LANDSCAPE P2P lending (also sometimes referred to as marketplace lending), is the practice of using technology to connect those who are seeking finance with those who have money to invest. The idea is that both sides receive a better deal by cutting out the financial intermediaries – typically banks and building societies – through which those seeking finance have traditionally only been able to access money. The benefit to the lender is a potentially higher rate of return than would typically be seen on a bank deposit - certainly higher than has been achievable in the low interest rate environment since 2008. The risk of course is that borrowers default and do not pay the money back, although there are several ways this risk can be mitigated that we’ll discuss elsewhere in the guide. The benefit to the borrower is that the cost of borrowing can often be cheaper and the whole process, from application to receiving the money, is quicker. It is also the case that some borrowers who have been rejected by banks can borrow from P2P platforms. The platforms typically have very low minimum investments - sometimes from as little as £5 – and the loans issued are often comprised of scores or even hundreds of different investors, from individuals to institutional investors. The P2P Landscape How it works 1.1 Three Key Drivers in the Investment Landscape LOW INTEREST RATES: Since 2008, the interest that can be earned on savings has been negligible. P2P investments can have a significantly higher yield. Low interest rates have also suppressed the performance of bonds and fixed interest instruments. “Investors are being forced to accept lower yields and longer duration than what they have been faced with historically” (Morningstar, Nov 2017). INFLATION: For the last decade, cash deposits have struggled to earn a real return and inflation is now at 3% and rising. P2P is an alternative that offers inflation beating returns. The collapse in interest rates and 26% inflation reduced the real value of £1,000 cash savings by £122 in real terms between 2007 and 2017. VOLATILITY: Although equity markets typically perform well over longer periods, they are also subject to significant periods of volatility. A portfolio of P2P investments can provide a much smoother return profile with minimal correlation. THESE THREE DRIVERS INTERACT: A well-chosen P2P portfolio can be an inflation-beating alternative to cash deposits, without the volatility that is associated with equity investments. P2P at a glance 30,000 SMEs received £2.9bn funding £3.55bn raised by P2P (2016, CCAF) 2005 first P2P lender £900bn predicted global P2P to reach by 2024 Rising inflation wipes out low returns: 3% CPI vs 1.86% 3 yr cash ISA 4-10% Returns vs. 1.09% (2 yrs average fixed retail deposit rate) Institutional funding 33-50% of P2P (2017, BBB) Downside protections asset backing/provision funds Decline of bonds/fixed income yields Fully FCA regulated Government support IFISA eligibility /Bank Referral Scheme (TRANSPARENCY MARKET RESEARCH) (BANK OF ENGLAND INFLATION REPORT, FEB 2018) (ONS/THE TELEGRAPH JAN 2018) (2016, CCAF) SOURCE: TRADINGECONOMICS.COM | DEPARTMENT OF TREASURY, UK SOURCE: HARGREAVES LANSDOWN 2007 2017 £1,000 £878 1981 1988 1995 2002 2009 2016 20 15 10 5 0 UK GOVERNMENT 10 YEAR BOND