lending has come a long way in a short space of time.
Originally formed as a platform enabling individual investors
to plug the
funding gap for small and medium-sized enterprises
(SMEs), after the financial crisis of 2008 in exchange for
a healthy return, it is now attracting the big guns of global
lenders see themselves as providing an essential service to
restart ailing economies, but also have a grander vision to
revolutionize credit by disintermediating banks from the
traditional lending process.
technology, they have been able to make loans at lower rates
for borrowers than traditional bank loans while offering higher
returns for investors.
of providers have entered the market in the UK and the US,
which is where P2P lending, also known as crowdfunding, is most
common. So far, the rise of P2P lenders has not threatened the
business models of big banks, which regards the industry as
providing a service they no longer wish to pursue –
the provision of small, unprofitable loans to SMEs.
massive deleveraging by Europe’s banks, which have
cut more than $3 trillion in assets, has sparked a secular
shift as banks pull back from lending, forcing companies to
look at alternative forms of financing, such as the capital
plays to the business models of investment banks, but recent
developments in the P2P space have raised its profile, and
its potential to disrupt the banking industry.
the size of the sector is growing. A report by Ernst &
Young says the three biggest P2P lenders in the UK have now
lent more than £600 million, while a recent survey by Nesta
predicts the industry will end up being worth £12 billion a
year in the UK.
Club, one of the leading P2P lending platforms in the US,
boasts former US Treasury secretary Lawrence Summers and
ex-Morgan Stanley CEO John Mack as directors and expects to
lend around $1.5 billion this year.
In the UK
last month, the Funding Circle, the UK’s leading
P2P platform – which has lent more than $250 million
since its inception in 2010 – joined forces with San
Francisco-based business lender Endurance Lending Network in a
deal aimed at tapping into what it sees as the $100 billion
funding shortfall for small businesses in the US
at the deal’s announcement, Samir Desai,
co-founder and chief executive of Funding Circle, says:
Financial services is going through the most significant
disruption for a generation. The way businesses borrow is being
transformed by eliminating the obstacles of an
outdated banking system and putting owners directly in
touch with investors looking to earn attractive
other signs the industry is coming of age. This month,
Eaglewood Capital, a New York-based investment firm, bundled
together $53 million-worth of P2P loans into a securitized
structure similar to the vehicles that sparked the US sub-prime
Collins, co-author of a report on P2P lending by Nesta, says:
It’s clear that the P2P model is moving more
towards an institutional client base and the platform was
created to provide a completely new product – the
provision of SME loans – to institutional
one doubts the P2P model is innovative, the question is whether
it is big enough or robust enough to become a long-term viable
alternative to traditional bank finance.
In the US,
only accredited investors – defined as having a net
worth of more than $1 million – can
Meekings, co-founder of the Funding Circle, says: There are
currently nine million accredited investors in the US, which is
a huge market, as they collectively manage trillions of dollars
of net worth. To build a really successful business that gets
finance to small businesses quickly and efficiently we will
continue to focus on accredited investors.
looking ahead five to 10 years, we would love to offer this
investment product to anyone in the US.
the industry as a whole is fragmented and lacks a common
Herrie, head of financial institutions for KPMG in the
Netherlands, says: Crowdfunding is a very interesting
initiative but it lacks the investment or credit analysis to
protect individuals when something goes wrong.
institutional investors entering the market and applying their
own internal risk model to add an extra layer of robustness,
P2P lending is gaining in importance.
believes its future lies in cooperation, not competition, with
traditional lenders and has already had approaches from leading
Dutch banks looking to participate with the new breed of P2P
been around for hundreds of years in the form of traditional
banks – they take money from individuals and transform
it into corporate loans, he says. One solution is for regular
banks to get together with crowdfunding platforms to act as