As much as growing pains are inevitable, it doesn’t make the experience any better; such has been the experience of the Peer to Peer (P2P) lending industry in 2019. While the most notable one is UK’s Lenndy going into administration for reasons still under investigation by the Financial Conduct Authority (FCA), Asia has seen a much more tumultuous time.
Between June 1st and July 20th 2019, 229 P2P lending platforms collapsed in China, under a flurry of changing government regulations, fraud investigations and Ponzi schemes. Tuandai, one of China’s largest P2P lending platforms collapsed with a loan balance of $2.17 billion, sparking protests by aggrieved lenders outside the company’s headquarters.
As a result, the China Banking and Insurance Regulatory Commission mandated four of the country’s asset managers i.e. Cinda Asset Management, Huarong, Great Wall and Orient, to help bail out the P2P industry from non-performing loans.
What is Working P2P Lending
Not all is gloom and doom in the industry, a 2018 report by Transparency Market Research pegs the P2P lending industry to reach $ 897.85 by 2024, this includes loans to small businesses as well as to individuals.
This growth will be boosted by advancement in technology that allows more people to access the services via mobile phones. Furthermore, lower operational costs of P2P lenders achieved through technology and agile business models: will enable them to scale quicker. For instance, 6 out of 10 loans issued by P2P platform Upstart, are automated, Funding circle another P2P lender has expressed intention to automate more of its lending to enhance efficiency.
UK’s Funding Circle, which listed on the London Stock Exchange in October 2018, focuses specifically on SME lending and has issued £ 5.4 billion in loans to businesses to date. Upstart, which uses artificial intelligence to determine credit worthiness, has lent $3.8 billion, while Fundrise, focusing on the real estate industry, has issued $660.3 million in loans which have gone into $3.2 billion worth of real estate.
As the numbers clearly show, the main question of P2P lending platforms is not their popularity, it’s whether they can be sustainable and scaled profitably while maintaining high returns for investors.
Lending Club, a US P2P lending platform which issued $10.9 billion worth of loans in 2018 alone, has shown promise. Even though the company had a loss of $128 million dollars in 2018, its CEO Scott Sanborn has said that the target is adjusted net income profitability in the second half of 2019.
Another avenue that will fuel growth for the P2P lending industry is providing loans to small businesses who were/are unable to access financing from traditional banks. This is the same niche occupied by P2P invoice financing platforms such as Invoizo, or Jack Ma’s MYbank; which, though not Peer to Peer, has issued loans worth $290 over four year, to Chinese small businesses using alternative data. The company has capitalised on the difficulty faced by smaller Chinese businesses in accessing loans.
P2P Failures and How they have Informed Policy
In June 2019, the Financial Conduct Authority (FCA), UK’s independent body charged with regulating the finance industry, confirmed a set of new rules meant to protect investors in P2P lending platforms.
The industry is evolving and the rules seem to go with it. For instance, in May 2019, Bondmason announced that it was pulling out of P2P lending; winding up its loan book over a 12 months period and not taking any new investors. The company’s withdrawal is due to concerns about not being able to offer investors attractive returns in the future: caused by industry changes.
The company is not financially in trouble; it has other products, and all investors with outstanding loans will receive their investment back with interest. However, what happens to investors’ loans when a peer to peer platform administering the whole thing closes down has been ambiguous; an issue the new FCA regulations have addressed. From December 9th 2019, all P2P lending platforms will be required to strengthen their rules on what happens to investors money, should they fail.
To limit investor exposure, the new rules also restrict the percentage of investment allowable to new retail investors, to not more than 10 % of their portfolio. This rule’s only exemption is if the new investor has received regulated financial advice. Additionally, all UK P2P lending platforms will have to test the level of financial knowledge of their investors who will have not received advice from a regulated entity.
Furthermore, the rules require P2P lending platforms to be explicit on their structures, systems and controls put in place to ensure that the outcomes promised to investors are achieved. These include “having an independent risk management function and an independent internal audit function; depending on the nature, scale and complexity of its business and the nature and range of the services undertaken.”
Also, they are to maintain a permanent and effective compliance function which operates independently. However, if the size or complexity of a platform makes having an independent compliance function disproportionate, then they can be exempted from running it independently.
Under the new rules, the company would have had to reveal its credit risk assessment, risk management and fair valuation practices to investors: and show how these will support the outcomes it had advertised.
This is likely meant to avoid situations like those in China, where people invested their entire life savings in P2P lending platforms hoping for large returns but were left to ruins when the platforms collapsed. Or in the case of Lenndy, which had promised investors returns of up to 12.3 % on loans they advance, a report by Telegraph Money had revealed that half of Lenndy’s £162.6 million loan book was considered non-performing, this was before the company went into administration.