Value Nomad

August 5, 2020

The State of P2P Lending in Europe

In response to the wild 2020 we’ve been experiencing, I decided to take some time to report on the state of P2P lending in Europe as I see it. Here’s what I see….

In order to discover the state of P2P lending in Europe, let’s start by getting some background and moving on from there.

state of p2p lending in europe

Since its advent during the 2008 financial crisis, the peer-to-peer lending market has grown significantly and expected to hit $312.6Bn in size in 2020.

The journey has not been without challenges, from Lendy’s collapse and subsequent move into administration, to the mysterious closure of Envestio and Kuetzal in Estonia. (Which are now being treated as fraud cases.)

Despite these setbacks, and many others, including the negative impact of the COVID-19 pandemic on businesses, the P2P lending market still has room for growth and innovation. Emerging industries tend to go through these boom-and-bust cycles as they learn and tweak their business models.

Below, we’ll look at the general state of the P2P lending market in Europe and the world. We’ll also look at the challenges, opportunities, and what the future holds for the industry.

First, however, let’s take a deep dive into peer-to-peer lending.

What is Peer-to-Peer Lending?

Peer-to-peer lending, also known as social lending, is a money lending concept. Instead of a central authority (bank) doling out cash to borrowers, platforms (P2P lending platforms), directly connect borrowers to lenders.

In yet another slight variant of the concept, which we shall call crowdfunding, different lenders invest in a project, such as real estate, and then receive their principal investment, plus interest and capital appreciation.

P2P lending is an old concept that has received a modern take. So, instead of borrowing from your loaded parents and relatives, you borrow from willing strangers on the internet on attractive terms.

You can already see the benefits of bypassing banks for both borrowers and lenders.

Pros of peer-to-peer lending

  • Better loan terms and processing speed for borrowers
  • Fewer requirements to qualify for a loan
  • Potential passive income for investors
  • Greater portfolio diversification since lenders can fund different loans
  • Higher than average returns for investors compared to traditional asset classes
  • Tax-free possibilities using Innovative Finance ISA’s
  • Better funding for social and sustainable projects

Cons of p2p lending

On the downside:

  • The industry is young and mostly unregulated which makes it prone to hiccups
  • There are still legal and tax grey areas regarding your investments
  • The FSCS does not cover your investment. If a platform goes down, you might lose your hard-earned money for good.
  • You may not always find a suitable, risk-appropriate investment immediately.
  • Lack of financial transparency on some P2P platforms making it difficult to evaluate potential risks

Peer-to-peer lending platforms advance loans to borrowers for different purposes. These include debt consolidation, vehicle purchase, real estate purchase and development, healthcare, etc.

However, according to market statistics, business P2P loans make 70% of all the loans and are expected to reach $219.1bn in 2020. On the other hand, consumer loans are expected to reach 93.5bn in 2020, or roughly 30% of the world market.

If you want to learn about peer-to-peer lending, check out our P2P 101 guide here.

COVID-19 – A different state of P2P lending in Europe in 2020

Even before the pandemic hit, some peer-to-peer lending platforms were having internal issues. Among the most cited problems include poor governance, weak corporate structures (or too complicated), lack of transparency, inadequate oversight, and outright fraud.

With the pandemic and the subsequent economic turmoil, most of these issues have come starkly to the fore, with the platforms slowly making necessary changes.

Grupeer, for example, is in the process of strengthening its business control, including making changes to corporate governance, licensing, AML procedures, among others. Here’s a chart shared by Grupeer on their website.

state of p2p lending in europe

One of the biggest P2P lending platforms in Europe, Mintos, revealed in its 2019 annual report their financial numbers, and also growth plans for the future. Some investors have raised concerns over the significant pending and defaulted loans (amounting to about 84.5million).

P2P lending platforms are not immune to COVID-19 shocks. They have felt the impact along with other businesses and the general economy.

A Bright Side

However, it’s not all doom and gloom. UK’s largest peer-to-peer lender Funding Circle has seen a marked increase in searches for business loans during the pandemic. Furthermore, many European P2P investors continue to make investments and haven’t made significant changes to their existing portfolios.

Part of the reason may lie in the fact that millennials make a large chunk of P2P investors in Europe. Tech-savvy millennials continue to challenge the mold and are more likely to dive head-long into emerging investments and take on more risks.

According to data gathered by Finanso.se, the state of P2P lending in Europe is healthy, with the market expected to maintain its growth this year. Experts project a 12.2 percent year-on-year growth, reaching a transaction value of $6.5 billion.

Overall, the European P2P business lending industry is projected to hit $7.1 billion worth by 2023, nearly double its 2017 figures.

P2P Lending in the UK

The United Kingdom is the leading P2P Lending market in Europe, and by far the best regulated since most platforms fall under the Financial Conduct Authority(FCA).

It’s expected to see deal growth of up to 71,600 in 2020 from 63,000 in 2017. The average funding per loan is projected to jump to $86,000 in 2020 compared to just $58,000 in 2017.

Overall, the UK peer-to-peer lending market is expected to reach $2.6 billion in transaction value in 2020, followed closely by Switzerland with more than $1.4 billion worth of P2P business loans.

What’s Driving the P2P Lending Market in Europe?

The state of P2P Lending in Europe seems healthy despite the headwinds posed by the pandemic and loss of public trust due to a string of platform collapses.

Looking at the fundamentals, the structural issues that led to the rise of the P2P industry are still rife and exacerbated by the pandemic. Banks are now more than wary about lending to small businesses due to the harsh economic times and shifting economic models.

P2P lending platforms are well placed to pick the slack. They are more agile. They don’t suffer from the same regulatory environment, or the legacy technology that bogs down big banking institutions.

Industry Arc in a report expects the peer-to-peer lending market to see accelerated growth, especially in the real estate and business sectors.

The growth stems from low-interest rates, government stimulus packages for small businesses, simplified online platforms, faster loan approval processes, and higher loan term transparency than traditional banks. For example, the UK is expected to experience a 23-percent compounded annual rate in the P2P Lending market, while other countries will see healthy growth.

Tech-Driven P2P Lending Market in Europe

P2P Lending platforms are largely tech-driven, which gives them a competitive advantage over banks that are still playing catch up.

Traditional banks are also saddled with legacy technology and regulatory environments that are yet to catch-up with the realities of the 21st century.

As such, peer-to-peer lending platforms have invested heavily in technology, and incorporated AI and machine learning to enhance underwriting. They are also embracing the blockchain and smart contracts, which improves transparency and loan processing speed. These steps, along with internal governance controls, make the P2P lending process more transparent, straightforward, and reliable for lenders and borrowers.

These are the same technologies that, if widely adopted, will give the P2P Lending industry in Europe a leg up on traditional financial institutions. However, banks, too, are catching up quickly.

P2P Lending Market Regulation in Europe

The European Parliament has been weighing a set of proposals for EU-wide crowdfunding regulations since March 2018. While a set of harmonized rules were agreed on in 2019, the European Crowdfunding Network says there is still more to iron out before the regulations come into force. According to the network, this may not happen until 2021.

However, the sudden collapse of two platforms in Estonia and the loss of investor wealth might accelerate the process.

Unlike the EU, the UK is better placed to navigate the regulatory waters since the vast majority of P2P players operate under the Financial Conduct Authority. Therefore, they must comply with regulations surrounding solvency, protection of investor funds, and wind-down plans.

According to most industry experts, the FCA is at the forefront in strengthening the P2P Lending industry. For example, the introduction of the investor protection rule prohibiting investors from investing more than 10% of the assets in P2P investments without financial advice has brought some discipline to the industry.

Overall, even without regulation, P2P Lending market platforms in Europe must be more transparent about financial situations, historic performances, loan books, and other attendant risks to their business. They must also put in place better corporate governance structures, and robust customer/investor relations departments to handle queries.

Conclusion

That is the state of P2P Lending in Europe. Despite the challenges and awareness of the opportunities, it’s clear that the industry has strong tailwinds in its favor. However, unless P2P platforms put their houses in order, these tailwinds won’t materialize.

An increasingly transparent P2P lending space is attractive not only to borrowers but to investors. P2P platforms already utilize cutting-edge technology like AI, machine learning, and the blockchain to quickly evaluate and approve loans. That gives them a competitive advantage over traditional banks.

With the right structures and proper regulation, the P2P Lending market in Europe can disrupt and rival the traditional financial markets. And with it, raise the fortunes of P2P investors like you.

Crowd Investing Resources

Looking for more options? You might want to read some of our other crowd investing and peer to peer lending reviews. There are many P2P lending and investing platforms currently available, and you can diversify your interest income by using several of them simultaneously.

You can consider some other peer to peer companies by checking out our Estate Guru review or our Mintos review. Also check our posts on the best peer 2 peer lending platforms in Europe, and theĀ best real estate crowdfunding platforms in Europe.

Are you already investing in any peer to peer lending platform? Leave your thoughts and questions about this article below.

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