Is There a Peer-to-Peer Lending Bubble in the UK?

BubbleFintech is super-hot these days.  Finance is having its newspaper moment where all aspects of the industry are moving online.  The disruptive shift is global too as change is taking place in the Americas, Asia and across Europe. The UK is in many ways the epicenter of this emblematic change.  Peer to peer (marketplace) lending claims its roots in Zopa – the largest of the online lenders in the UK. The rapid innovation has been aided by a government that is supportive of entrepreneurs and regulators dedicated to fostering competition.  But is P2P lending becoming a bit of a bubble?

According to a recent report in BI, the boom is “reminiscent of the dotcom bubble”. The author spoke to LendInvest CEO and founder Christian Faes, who operates a P2P platform dedicated to short term mortgages.  According to Faes;

“We think there’s growing skepticism about the whole fintech space and particularly peer-to-peer about whether these businesses can ever actually be profitable.”

Christian Faes“I think the skepticism is right. There’s a lot of businesses that have raised a lot of money over the last few years at seemingly crazy valuations and some of them don’t appear to have any prospect of making any money at least in the next 5 years.”

“Understandably people in the City start to scratch their heads and wonder what the hell is going on and think it’s a bit reminiscent of the dotcom bubble. “

Faes states they are not “fueled by giddy VC money to keep the lights on” casting shade towards operations that are not making a profit. LendInvest, notably, recently announced its second year of generating net income.

The UK is regulated quite differently than in the US.  If you want to set up a platform that allows non-accredited investors in the States, you must subject yourself to a raft of regulations and work with a bank.  In the UK, the barriers are far lower but this is starting to change.  It appears the FCA is putting the brakes on a bit as it was recently reported that out of 114 applications to operate as a P2P Lender 30 have been partially, or completely, withdrawn.  The consultancy who created the report stated;

“The high number of withdrawals suggests that the FCA is setting the bar high when it comes to full authorisation for P2P lenders- the process appears to be much tougher and more costly than many firms first anticipated.”

The online lending industry has benefited by the leadership and advocacy of the UK Peer-to-Peer Finance Association (P2PFA). The association represents “over 90%” of the P2P lending market. The P2PFA has set a high bar of best practices and transparency, recognizing the importance of engendering a lending industry that protects both consumers and investors. You may view the list of members here.

In a relatively new and fast-growing industry, it is inevitable there will be bumps along the way. Regulators walk a fine line of allowing an industry to grow while encouraging rational growth. Eventually, things will slow, and P2P lending will become the norm – not the exception.  Prior to this occurrence, there will be a period of consolidation as smaller, less competitive platforms are acquired or simply move on.  Louise Beaumont recently told Crowdfund Insider the industry embraces a “strong regulatory framework” – something most all industry participants echo.louise-beaumont

“A strict and enforced regulatory regime will lead to consolidation and rationalisation of what is currently a fragmented marketplace. This should be welcomed as it will ensure that the best business models and most professionally run, compliant organisations are able to succeed.”

So is P2P reminiscent of the DotCom bubble? Having lived through it as both an observer and investor I believe it is not.  The DotCom bubble was fueled by “irrational exuberance” driven by overly enthusiastic IPOs by firms with a catchy name and virtually no revenues at all. The leaders in the P2P space are generating significant revenue – even if none of it is dropping to the bottom line (yet). Sure there is plenty of excitement in the sector – much of it merited and some not so much.  But no DotCom type bubble here.


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