P2P Guide

Returns 9 THE P2P LANDSCAPE How do P2P platforms do all of this? • As online businesses with no branch networks to maintain and fewer staff, their cost base is lower, allowing them to pass on saving to borrowers and lenders in the form of better rates. • As high tech businesses without the legacy systems that banks work with, they have developed more efficient processes for assessing loans. • Some P2P platforms are specialists, for example focusing on lending to property professionals. Specialist knowledge helps them source higher quality borrowers and optimise their loan books to maximise risk adjusted returns. Typical net annual returns range between 4-10%, depending upon the business model and level of risk. At 28 February 2018, AltFi data recorded UK net one year returns at 6.0% and three year returns at 18.5%. Methodology The AltFi Data UK Lending Returns Index measures the returns available from tech enabled lending in the UK. Index values are published as an annualised return, measuring what an equal time-weighted exposure to every loan originated by the participating platforms would have generated over the preceding 12‑month period. The return has been calculated after fees and is expressed net of losses. Index calculations are based on loan level data from Funding Circle, Market Invoice, RateSetter and Zopa. SOURCE: ALTFI DATA, 28 FEBRUARY 2018 YIELD RETURN LOSS ALTFI DATA UK LENDING RETURNS INDEX Lower cost base Efficient assessing loans Specialist knowledge 50+ UK lending platforms The advantage of peer to peer loans for lenders is that they can generate higher interest rates that exceed the interest that could be earned from banks and other financial institutions. HMRC, GUIDANCE PEER TO PEER LENDING, 6 APRIL 2016 Evolution 1.2 The world’s first P2P lending platform was Zopa, launched in the UK in 2005 with a simple consumer lending model. The period after the 2008 financial crash has seen banks reducing their lending activity and the EU Basel regulatory frameworks, including Basel III, currently in an implementation period due to last until 2019, continue to encourage this trend: they require banks to hold significant amounts of capital against risky assets as security against potential financial shocks and asset failures. This has increased the cost of lending, making it increasingly unprofitable for banks to make small ticket loans of £250,000 or less, or higher risk transactions, such as loans to consumers. This has continued to drive deal-flow for P2P platforms with increasing numbers of borrowers seeking loans and investors (lenders) looking for higher returns than those offered by a low interest rate environment. Since Zopa’s launch, a great many P2P lending platforms have sprung up around the world, and the UK and US are the market leaders in terms of the number of platforms and lending volumes. In the UK, £13.69 billion has been lent to date (December 2017, AltFi Data). £4.99 billion of that was lent in 2017. In the US, the comparative figures are $68.09 billion and $21.04 billion. There are now over 50 FCA authorised platforms in the UK (P2P money), all with slightly different operating models (see the P2P Business Models section). However, the biggest 2-3 platforms in each P2P sub-sector account for the vast majority of lending volume (Zopa, Ratesetter, Funding Circle, Assetz, Octopus Choice and Market Invoice). Government Support In the UK, P2P benefits from government support designed to widen the routes to finance for UK businesses: Over £100 million has been provided to P2P platforms by the British Business Bank for onward lending to SMEs (BBB). The bank referral scheme was launched in 2016 as a method for the government to track firms and their requests for business finance. Banks that turn down business applications ask for permission to pass on the financial information of the failed applicant to designated P2P finance platforms. The platforms can contact the business in a regulated timeframe. The Innovative Finance ISA was launched in April 2016, initially with only P2P loans eligible to be held within it. -3% 0% 3% 6% 9% 2007 2009 2011 2013 2015 2017