Jargon busting: What is P2P (Peer to Peer) Lending?
(Capital at risk - Past performance does not guarantee future results)
Peer-to-peer (P2P) lending (also sometimes known as ‘social lending’, ‘marketplace lending’ or ‘crowdlending’) allows people to obtain loans directly from another individual: expensive established, traditional financial institutions stop being the middle man.
The P2P market started in around 2005. In the early days, the P2P lending system offered credit access to people who conventional institutions wouldn’t loan to (sub-prime loans), or as a cheap way to consolidate student loan debt.
Since those early days, other types of sites have emerged to enable new kinds of P2P lending, and it’s becoming increasingly popular, allowing a completely new type of non-institutional investor to emerge. (Our site, easyMoney, launched in 2018, is one of these ‘new’ P2P sites.)
In the past decade, P2P sites have become viable, attractive, alternative investment options for individuals/ organisations in search of better returns. Lower infrastructure and operating costs than big institutions usually result in a better deal for lenders/investors than usual.
Moreover, the efficient matching of the supply and demand of capital (money) has generally resulted in a better deal for lenders and borrowers alike.
The industry today is very broad with multiple platforms, varying rates of interest and differing approaches to risk. It’s important to research and choose the right investment to ensure you have a comfortable balance between risk and reward.
The P2P Market: Growing and Maturing
According to Allied Market Research’s ‘Peer to Peer Lending Market Outlook – 2027’ report:
“The global peer to peer (P2P) lending market size was valued at $67.93 billion in 2019, and is projected to reach $558.91 billion by 2027, growing at a CAGR of 29.7% from 2020 to 2027.”
(CAGR is Compound Annual Growth Rate, is the average (‘mean’) annual growth rate of an investment over a specified period of time longer than a year. It’s usually an accurate way to calculate and determine returns for anything that can change - rise or fall - in value over time.)
From a Worldwide perspective, the two dominating forces in peer-to-peer investing are China and the USA, with the UK in third place.
According to P2P Market Data, the UK has the largest market share of the crowdfunding market in the European region (67.7%), and, with a market share of around 72.5%, is the largest P2P lending market. The market size, measured by revenue, of the Peer-to-Peer Lending Platforms industry is £374.0m in 2021. The market has grown 32.6% per year on average between 2016 and 2021 (quote: https://p2pmarketdata.com/p2p-lending-united-kingdom).
That market growth (of the Peer-to-Peer Lending Platforms industry) is expected to slow, but still to increase by 27.5% in 2021. At easyMoney, we see this as a sign that the market, whilst still innovating, is also maturing. Our sector fundamentally delivers great value and we believe it has a bright future.
Who loans and borrows in a P2P loan?
P2P lenders are usually individual investors. Often, they are motivated either by a better return than other types of investment, or by looking for an alternative to traditional banks. They simply open an account with their preferred provider, who then connects investors and borrowers.
Each website/supplier sets rates and terms and eases transactions, within its own parameters and types of investment. Sometimes the loan applicant can review offers and accept one. Sometimes the investor has a choice of where to loan/what to loan for. Sometimes, like us, the provider will do the legwork on investors behalf. (For this reason, it’s important for investors to understand what’s expected of them, and what will happen to their money.)
What they do have in common is that the money transfer and any payments are handled through the platform. This is often automated, although some platforms allow lenders and borrowers to negotiate terms.
Some sites - like easyMoney – specialise in particular types of borrowers. For us, it’s secured property loans to a maximum of 75% of value – usually less - but others out there exist for loans for small businesses, for private medicine, to resolve credit card debt at a lower interest rate, for home improvement loans or vehicle financing, as examples. Some platforms will therefore run financial checks on investors as well as borrowers.
The sites/companies providing the service aren’t charities, and will make charges or take interest. This is almost always on better terms than traditional banks, but it’s important for investors/loaners to understand how the provider makes their money. (See: how easyMoney charges).
Regulation and Risks
Most P2P platforms/companies are NBFCs (Non-Bank Financial Companies). They provide services like banks and traditional financial services, but they do not have to hold a banking license. They are often, therefore, unregulated by financial and state regulators.
However, in March 2018 the European Commission presented proposals for a regulatory framework for the industry. This growth of financial services regulations would seem to confirm our belief that the market is now mature and stabilising. Most regulations will be welcomed by good providers, provided that they do not impose huge financial costs.
However, your P2P investment is currently not protected by the Financial Services Compensation Scheme in the same way as it would be in a savings account.
The payback for that ‘risk’ is that many of the platforms (including us) will spread the risk and they will usually be able to offer a far better rate of return. However, there is never a guarantee of return, and investors should look at their own appetite for risk and how reliable/conservative the site/company making the investment is or isn’t.
As there is no safety net, your own risk assessment is vital. Investors/advisers should find out everything they can about the people/company behind the platforms, and about the loan investments they manage.
As with any high growth emerging sector, a lot of companies enter the market, and some will not survive, because they can’t make the economics work, don’t have the skills or resources, or can’t scale effectively.
However, since 1 April 2014 platforms need to be authorised by the FCA (Financial Conduct Authority). P2P platforms may also need other permissions, depending upon the activities they undertake. Financial advisers recommending P2P schemes are monitored by the Financial Ombudsman.
A Quick Note about P2P Investing with easyMoney
The easyMoney peer to peer lending platform matches property professionals needing short term finance for business purposes (from three to 24 months) with investors looking to invest, backed against UK property. easyMoney undertakes rigorous due diligence on all borrowers and the properties against which your money is lent.
Our easyMoney senior team has more than 100 years of combined experience in property and property lending.
You can see some of our recent investments on the front page of our website, currently a mix of development and bridging loans.
We believe that our combination of the ‘easy’ brand and backing, great people, relatively conservative lending approach, and the continued strength of the property market will continue to mean good news for our customers.
“Been with easy money [sic] for a year now. No default and yields in line with what they claimed. So far so good!” (Vincenzo Mangano)
easyMoney is not a cash savings account. You may not get back the full amount you put in. Your capital is at risk if you invest. Peer-to-peer investments are eligible for an Innovative Finance ISA which is not a Cash ISA. They are not protected by the Financial Services Compensation Scheme (FSCS). Money invested through easyMoney is concentrated in property and could be affected by market conditions. For the same reason, instant access cannot be guaranteed. We do not offer investment or tax advice.
easyMoney is the trading name of E-money Capital Ltd, a company incorporated in England & Wales. Registered office is 5 Fleet Place, London, England, EC4M 7RD (Company No. 04861007). E-money Capital Ltd is authorised and regulated by the Financial Conduct Authority (FCA) #231680.