Bond Mason: Over half of wealth managers would now recommend direct lending as an alternative to mainstream cash products.
BondMason has published its Market Report 2017 reviewing the trends in the UK peer to peer lending market. BondMason is a platform that provides investors a method to diversify their investments across many P2P lending platforms.
According to BondMason’s research, P2P lending is beginning to see a flight to quality as the industry matures and weaker platforms exit the market. BondMason’s numbers indicate that the UK direct lending market totaled £3.2 billion of lending in 2016. This is an increase of 39% versus 2015 but a drop in growth as the industry grew by 91% from 2014 to 2015.
Stephen Findlay, CEO of BondMason, says the P2P lending industry is still experiencing impressive growth.
“What we are seeing right now, and what we believe to be the reason for the slow-down, is the start of a “flight to quality” whereby better lending platforms outperform and evolve faster and more sustainably than weaker ones, forcing the underperforming platforms to start to lose market share and then move out of the market altogether. This is good news for lenders, for borrowers and, ultimately, for the market itself.”
BondMason believes there is significant room for growth of the online lending sector. While P2P lending accounted for £3.2 billion during 2016, the total addressable market is between £100 to £120 billion in the UK.
“There is plenty of room for direct lending to grow over the long term as it is still very small in the context of the overall lending market,” says Findlay. “This is exciting news for retail and institutional investors alike: competition is raising platform standards, while the growth potential for the market as a whole means that there remain great opportunities out there for investors.”
The report also says there is a migration of retail investors moving away from other more volatile markets. P2P lending holds a middle ground of risk versus return. BondMason says that over half of wealth managers would now recommend direct lending as an alternative to mainstream cash products. Simultaneously, insititutional interest has grown and now accounts for over half of the money flowing into direct lending. This is the first time institutional money has topped retail money since the P2P lending industry started.
Findlay also sees more investors flocking to Robo-investing or passive services that assists investors in the allocation of their money (like their service).
“We predict that direct lending will soon become a pension-grade investment product, as more and more institutional investors take advantage of this growing industry. This makes direct lending a real game-changer for the future of pension provision, in an environment where everyone is searching for a way to make their money work harder for their retirement,” states Findlay.
Findlay believes there are challenges for P2P lending. While the FCA authorisation is a “badge of trust” it does not assure returns for investors.
“Regulation doesn’t guarantee the quality of a platform. When investors are looking to deploy capital across P2P platforms, FCA authorisations will serve as a ‘badge of trust’, but just because a platform is FCA regulated that doesn’t guarantee good loans or good returns to lenders.”
Findlay says he looks forward to the outcome of the current FCA regulatory review of the crowdfunding / P2P lending industry.
“..frankly, regulation should not be relied upon to protect the industry,” explains Findlay. “It requires market participants to do their bit to ensure the highest quality and a responsible attitude towards investors and client money. At BondMason, we work together with the leading players to develop best practices – we’d like to see the same with other providers.”
BondMason expects further consolidation for 2017 – mainly between alternative and traditional finance providers. BondMason predicts the market will move from “opening” to “scale phase”. Iimproved regulation will move the relatively nascent industry to a more established means of lending.
“There is still so much potential for the direct lending market. We expect to see this “flight to quality” really take off over the next 1-2 years and for increased competition to lead to notable platform failure as it becomes harder for platforms to sustain revenues to cover their cost base,” says Findlay. “Furthermore, the range of investors and the methods of investing will diversify, competition and consolidation will continue to produce better products, and regulation will improve as the industry becomes more established.”
Findlay says that direct lending is here to stay.
“…we expect it to evolve and change form over the coming years – becoming an ever-increasing component of asset allocations for retail and institutional investors.”
The report may be downloaded here after you provide your name and email address.