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The road less travelled

Understanding the peer-to-peer market today

16th August 2019

Online crowding funding isn’t new. Rewards-based platforms, such as Kickstarter and Gofundme are well-established, but for investors looking to make financial returns, the peer-to-peer lending sector is the promising road less travelled. Major platforms, such as Funding Circle, have been running for almost a decade now, but many are no more than only a few years old and not regulated by the FCA. With the recent collapse of Lendy, are people right to get nervous about what is in store for this young industry? 

Lendy allowed investors to invest in UK property – a lucrative and potentially profitable market. But over its short life, the number of performing loans steadily decreased until the business collapsed earlier this year. Investors stood to lose close to half the £152 million they had invested in the platform, as they were not protected from losses. Worryingly, they were also an FCA regulated platform, leaving investors understandably cautious of the peer-to-peer sector. 

It is not just smaller platforms facing bumps in the road. Funding Circle, who went public last September and have a majority share of the peer-to-peer market, have seen their growth forecasts slashed by 20%. It is possible that as a listed company they are under an unfamiliar pressure to grow, and could potentially start issuing loans to businesses they may have previously rejected. The company have put this down to the economic climate, with both businesses and investors facing uncertainty in the lead up to Brexit. The news of this slow-down led their shares to fall, although reassuringly for the industry, they have recently recovered. 

The year ahead is going to prove critical for the peer-to-peer debt sector for several reasons. Loans typically take two to five years to pay off, so defaults will start appearing more frequently as time goes on. The true impact of Brexit is yet to be known, but it is likely to affect the behaviour of investors and businesses. There are also hints of a recession, with GDP slowing to 0.3 per cent in May, from 0.4 per cent in April.  

So, what can you do as an investor? More than ever, understanding the due diligence process of a lender is key. Assessing the criteria used by a platform can help you make an informed decision. Furthermore, taking the time to research an opportunity before you invest can ensure you stay within your risk appetite. It is also important to remember that peer-to-peer lending is like any other form of investing: just like investing in the stock market, some investments will win and some will lose, and therefore diversifying is essential. The FCA recommends you only invest 10% or less of your wealth in peer-to-peer loans. Look out for features such as Crowd2Fund’s Smart-Invest, which allow you to spread your funds across numerous opportunities. It is also worthwhile considering the net returns of P2P compared to other asset classes. For example, the top-performing cash ISAs are currently only paying out around 1.5% due to a low interest rate environment.

A final lesson we can learn from the fall of Lendy is to choose platforms with a focus on transparency. Look for clear rates of returns, defaults and loans in arrears or written off. For example, how many defaulted loans are recovered? How much are their investors actually making? Ultimately, investors are right to be cautious following the collapse of Lendy, but there are still great profits to be earnt and businesses to help grow. Doing your own research on platforms and diversifying will be key to your success.

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Risk warning

Past performance and forecasts are not reliable indicators of future results. Your capital invested is not covered for compensation in the event of a loss by the FSCS. Tax treatment will depend on the individual circumstances and may be subject to change. Please see our Risk section before making an investment decision.