The Bankwatch

Tracking the consumer evolution of financial services

New Datamonitor report on P2P Lending in the UK has some interesting analysis points

I do not have access to the report, but the  summary is intriguing.  Recently Zopa have been lobbying for regulation of P2P Lending in UK.  It is interesting that Datamonitor refer to low barriers to entry as creating more competition.  My impression is that regulation would be a good thing to ensure quality of the providers to ensure longevity of the business model.

The scope does briefly mention the consideration of regulation, but hard to critique without the report in hand.  There are some fascinating statements in the analysis summary (pasted below) that are very interesting, such as:

”Naive investors who invest across different risk classes will not know the probability of expected returns deviating from actual returns“

UK Personal Lending 2010: Peer to Peer Lending | Datamonitor

Peer-to-peer lending has taken a small but growing share of gross advances in the UK unsecured personal lending market since the concept was born in 2005. It is now a viable alternative option for lenders and borrowers alike.
Scope

  • Analyses and forecasts the shape and size of the peer to peer lending market
  • Identifies main competitors and their business strategies
  • Considers future avenues of market development

Report Highlights
Peer-to-peer lending has seen its market share of gross advances increase as a result of the credit crisis. However, it remains a small part of the unsecured personal lending market in the UK.
Zopa was the UK’s only player in the peer-to-peer lending market from 2005 to 2009, however recently there have been two new entrants into the market; Yes-Secure and Funding Circle. This has created more competition in the market and highlighted the low barriers to entry.

 

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Pasted from Analysis summary:

DATAMONITOR VIEW

Catalyst
Summary
ANALYSIS
P2P lending is increasing its market share of gross advances as a result of the credit crisis
P2P lending companies are platforms that facilitate transactions between lenders and borrowers
Lenders invest their money into the P2P lending platform, seeking greater returns than those available on alternative financial products
Only consumers that have a good credit rating can become borrowers on P2P lending platforms
The market is subject to high level of adverse selection
P2P lending requires risk management to reduce the chances of lenders losing their investments
Default risk is usually shouldered by banks in the traditional lending and borrowing system
The P2P lending company is responsible for identity checks 5
Borrowers and investors are protected against the risk of the P2P lending company going bankrupt
P2P lending companies are not authorized and regulated by the FSA
P2P lending companies have to register with the Office of Fair Trading
P2P has lower overheads, but banks do not charge upfront arrangement fees
The P2P lending market has experienced exponential growth from 2007
The P2P lending market grew at a CAGR of 80.9% from 2005 to 2009
P2P lending made up a negligible percentage of the UK unsecured personal lending market over the past five years
P2P lending companies will not increase their market share of gross advances significantly in the near future
As the economy recovers, banks will increase their gross lending
New high street banks will increase competition for deposits and advances
Increased liquidity in the P2P markets will attract more investors
Zopa is the main UK player, although others are entering the market
Zopa is the main player in the UK market
The average Zopa lender is more mature than the average borrower
Zopa offers competitive market rates
Zopa’s growing reputation has encouraged other players into the market
YES-secure start trading in June 2010
Funding Circle focuses on small business lending
Minor barriers to entry make it easy for competitors to enter the market
Competitors in the US could branch into the UK market
Aggregator websites and promotional offers attract new business to P2P lending websites
Existing players have performance data
Consumers are unaware of how the different types of risk will impact on the rate of return of their investment
Investors fail to realize the additional risks they face by investing in P2P lending
Investors cannot access their funds until the end of the contract
Reinvestment risk could see investors’ risk/return ratios change over time
Naive investors who invest across different risk classes will not know the probability of expected returns deviating from actual returns
Listings allow borrowers to get competitive loan rates as supply outstrips demand
Consumers are more resistant to taking on debt than before the financial crisis
Movement between different markets requires borrowers to increase their record of successful borrowing
Product innovation and secondary markets could be the future for the P2P lending market
Secured personal lending could be the next step in P2P lending
Expansion into the mortgage market is likely to be too complex for P2P lending companies
The development of a secondary market would add sophistication to the field
The secondary market allows for notes to be bought and sold
The secondary market attracts a more sophisticated investor
The UK market could follow in the US’ footsteps
A secondary market would increase liquidity and attract new members
P2P lending companies can attract the attention of a variety of different clients to increase growth
APPENDIX
Data
Definitions
Borrowers
Lenders
Listings
Further reading
Ask the analyst
Datamonitor consulting
Disclaimer
List of Tables
Table 1: Zopa’s average clientele 2010
Table 2: Average statistics on amounts borrowed using Zopa over the 30-day period starting July 10, 2010
Table 3: Average lending rates on unsecured lending of £5,000 offered by institutions with lowest rates
Table 4: UK P2P gross lending, £, 2005-09
Table 5: Gross lending in the total unsecured personal loan and P2P market, £m, 2005-09
Table 6: Total gross advances and P2P gross advances forecast, £m, 2010-14
List of Figures
Figure 1: Gross lending in the P2P market has grown exponentially since 2007
Figure 2: The total UK lending market has experienced a year-on-year decline since 2005
Figure 3: P2P lending will see a strong rise in business in 2010, but will flatten out over the forecast period
Figure 4: Zopa listings show lenders battle to win investments
 

Written by Colin Henderson

October 2, 2010 at 19:36

Posted in P2P Lending

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