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Peer-to-peer lending (P2P) really came to fruition in the early-mid 2010s when the “Big Three” platforms of Zopa, Funding Circle, and RateSetter had launched and bedded in their lending models. By 2018, the UK market grew to include dozens of platforms offering a multitude of lending opportunities. The now multi-billion-pound industry has reached a level of maturity where major players are looking at different avenues to grow: Funding Circle is expanding globally; Zopa is becoming a bank, and RateSetter is offering exposure to a range of asset classes. In addition, there are murmurings of IPOs circling. We ask the questions: Why are they expanding outside of pure UK P2P? And why now?
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Since 2005, approximately £12 billion has been lent across 23 major peer-to-peer lending platforms. A crude segmentation of the market would be the “Big Three” and the rest.
As we’ve observed, 77% of capital lent in 2017 originated across Funding Circle, RateSetter and Zopa combined. Generally, the Big Three have occupied 2/3 or more of the market over time. This reflects the strength in brand, which for these major players has been nurtured over several years.
What does this suggest? Well, what’s clear is that a significant share of the market and year-on-year growth isn’t enough to satisfy ambitions. The UK market and the standard product-sets available within P2P are perhaps not enough.
A report recently published by Oxford Economics entitled The Economic Impact of Lending Through Funding Circle stated that ‘Funding Circle is the leading small business loans platforms in the United Kingdom, United States, Germany, and the Netherlands.’ In terms of employment generated from loans made across the platform in the four countries, the report found that 75,000 jobs were created in 2017.
After expansion into the U.S, Funding Circle joined up with Zencap in 2015, thereby facilitating their move into Europe (specifically Germany, Spain, and the Netherlands).
At the time of the Zencap news, Samir Desai, CEO of Funding Circle, stated:
‘OUR VISION IS TO HELP MILLIONS OF BUSINESSES ACROSS THE WORLD SIDESTEP THE OUTDATED AND INEFFICIENT BANKING SYSTEM AND BORROW FROM INVESTORS.’
While most P2P lending platforms concentrate on one market, e.g, Zopa on consumers and Funding Circle on businesses, RateSetter offers exposure to loans in consumer, property, and business markets.
RateSetter is steadfast in its focus on retail investors, unwilling to be influenced by the allure of institutional money – in 2017, only 2% of capital lent across RateSetter came from institutions, this compares to Funding Circle at 61%.
‘WE FOUGHT HARD TO ENSURE THE NORMAL SAVER – WHATEVER THEIR DEPOSIT – IS ABLE TO ACCESS THE MARKET EASILY AND ISN’T FORCED TO GO VIA AN INTERMEDIARY. WE BUILT OUR BUSINESS AROUND THE RETAIL CUSTOMER. THAT WON’T CHANGE.’
In late 2016, Zopa announced plans to launch a “next-generation bank” alongside the platform’s investment arm of the business. At launch, Zopa plans to offer FSCS-protected deposit accounts for savers, P2P investments, including Innovative Finance ISAs, and personal loans, car finance, and credit cards for people looking to borrow.
In a blog post, Zopa CEO, Jaidev Janardana, exclaimed:
‘WE’RE UNIQUELY PLACED TO MAKE THE NEXT GENERATION BANK A LEADER IN CONSUMER FINANCE. NO OTHER PROVIDER HAS [OUR] COMBINATION OF ATTRIBUTES.’
By broadening its range of products, Zopa is offering greater choice to consumers and challenging the traditional banking system which lacks cutting edge and high-quality customer service. The company’s vision is to ‘make Zopa the best place for money.
Funding Circle is investing heavily in its global expansion plans – evidenced by a £35.7m loss for the Group year ending 31st December 2016 – and is, allegedly, readying for an IPO later this year having raised £82m in January 2017. The company is valued around the £1bn mark and has sourced big hitters to support the float, including Merrill Lynch, Morgan Stanley, Goldman Sachs, and Numis.
Zopa and RateSetter have both expressed an interest in listing their businesses. Zopa raised £32m in June 2017 from India’s Wadhawan Global Capital and is preparing for a £50m raise, valuing the business at £400m. This is understood to be a pre-IPO round according to Sky News. Last year, RateSetter’s chief executive, Rhydian Lewis, confirmed plans to IPO in a bid to solidify its “investor brand”.
So why is it now that all three major players seem to be taking a leap? One key concern raised is around the sustainability of growth in pure peer-to-peer lending. The retail investor base in the UK is a niche in its hundreds of thousands and without intermediaries, the asset class will likely struggle to scale into the mainstream.
Moreover, the market has an abundance of choices in terms of loan originators, but differentiation in terms of products is sparse. For the Big Three, it’s important to differentiate themselves and appeal to broader audiences given they’ve reached a point where they occupy a significant portion of the UK P2P market. In order to achieve ambitions of being the first P2P platform in the UK to float, their plans need to be big. The race is on.