Realistic Expectations for Peer-to-Peer Lending

Graph of lending figures

Source: RSA

We always wanted peer-to-peer lending to be sustainable and fairly priced for borrowers, lenders and platforms. Allow us to explain why the latest bad news stories are making us feel good about UK peer-to-peer lending.

Benedict Dellot's blog has the emotional tone of an early Morrissey lyric.  "Was our faith misplaced?"asks the RSA's Associate Director. "Is the dream beginning to fade?" 

Business Insider prefers to confront us with the facts.

"The UK's 2 biggest peer-to-peer lenders, Zopa and Funding Circle, have lost at least £50.5 million since the first platform opened up in 2005, according to an analysis of accounts by Business Insider.

"These are not losses of investors who have loaned money over their platforms but losses made by the companies themselves in the course of running these platforms.

"The big losses at Zopa and Funding Circle raise questions about profitability in the sector, which is dealing with slowing growth and increased scepticism from investors and the financial establishment."

Oh dear. When you look at it like that, it doesn't look good.  Well, we have news for you. What we are witnessing with peer-to-peer lending happens repeatedly, almost all the time, in almost all innovative industries.  Life was ever thus. 

A diagram of the Gartner Hype Cycle

Source: Wikimedia Commons

This diagram is something called the Gartner Hype Cycle. It's a rather helpful tool for thinking about innovative and disruptive industries, and the way they attract investment. And it works on successful innovatiions, as well as the fads, fashions and failures.

Let's take the example of the personal computer. The old codgers who run Another Crowd remember Lord Sugar from the days when he was the head of Amstrad, the UK's most successful computer company.  We still have a computer screen on our desks, and Lord Sugar is still a successful businessman. But we've all come a long way since the Amstrad PCW was the must-have personal productivity.

That's how we expect it to be with peer-to-peer lending.  Ten years from now, we don't know whether Zopa and Funding Circle will still be in business, and whether or not they will still be household names.  But if they are, we expect them to have changed dramatically.  Success will not involve staying the same for very long - although it may entail making sure you hold on to your principles, while you adjust your business model

P2P platforms may help to bring parts of the financial industry back to its mores, but they are far from the silver bullet some portray them to be.

All disruptive industries start the same way: with an unmet need, and a sense - a vague, visionary sense, perahps - that somebody could address that unmet need by building a company that did something dramatically different from the companies that were trying to meet that need and not doing very well.

Our purpose in this article  is not to scrutinise the data and debunk the interpretetations, or to take anybody to task for optimistic when they should have been pessimistic, or vice versa. It's to reassure our readers that what we're seeing in 2016 is normal for innovative industries, and nothing - well hardly anything - is likely to be as outrageously good or appallingly bad as things feel when they change suddenly.

So what do we think is happening in 2016, and we does it make us feel optimistic?

  1. The great surge of peer-to-peer has stopped.  This is not a bad thing. 
  2. People are picking and choosing projects to back. (They always were; there was always a high rejection rate. But now its more apparent.)
  3. We can actually hear more voices in the conversation, instead of a binary football chant of "Good!" "Bad!" "More!" "Less!" "One!" "Zero!" 
  4. Firms and investors are learning, which is necessary, and very welcome. 
  5. "More of the same" has given way to "More variety."

We recommend you read both the pieces linked. We don't give advice, and we don't tell you what the answer is. But we do hope we can inspire to think for yourself, relate what's happening to your own needs, and invest cautiously and wisely.