10 years ago, you might not have heard much about P2P lending.
As an investment, P2P loans were considered very niche.
But a lot has happened in the last decade and P2P lending is now a part of many people’s investment portfolios.
So, what changed – why has P2P lending grown in popularity?
What’s caused this sudden growth in alternative lending?
Here, we’ll be looking into the history of P2P investing as an asset class as well as what the future looks like.
How P2P lending began
(P2P lending was actually a common activity long before that: there are records of communities and networks lending money to each other through credit cooperatives in France and Germany, dating back to the 18th century).
The modern-day principles of P2P lending haven’t changed much since then.
Today, it is powered by technology and therefore a lot more secure and easier to access.
P2P lending remained a niche asset class until the 2008 financial crisis. Before then, banks had a monopoly on lending and anything banking, or finance related. But when the financial crisis happened, trust in financial institutions fell and banks’ risk appetite fell drastically.
As a consequence of the financial crisis, several things started happening at once:
- SMEs started struggling to get a loan with the banks
- Investors began looking away from banking products and towards alternative lending solutions for more stable returns
- More alternative lenders came onto the market such as Ratesetter and Bondora
Thanks to the rise of fintech and technology, P2P platforms were a lot more nimble than banks, and are therefore able to take on more risk. P2P platforms were able to assess the creditworthiness of a borrower in minutes and offer loans in less than 24 hours.
Suddenly, lending didn’t have to involve the banks.
Where we are now
In 2019, the P2P lending market was valued at €60 billion, and it’s projected to reach €500 billion in 2027.
Although the first P2P lenders were mostly based in the UK and the US, we’re seeing a steady growth of lenders in Europe, especially in the Baltics and Nordics where regulations are more friendly to P2P lenders.
The industry is growing steadily every year, with Europe actually growing at a faster rate than the UK. From 2018 to 2019, European originators increased by 80%, from €3.6 billion to €6.6 billion. The UK P2P market only increased by 10.7% and in 2019 was valued at €6.26 billion.
Although P2P lending is popular in the developed world, it’s becoming increasingly popular in the developing world as well. This doesn’t come as a surprise since many businesses and individuals are underbanked and unbanked in the developing world, and P2P lending offers a way to get micro loans without requiring a bank.
Currently, most of the P2P lending market is for companies, with business P2P lending standing at 70% of the total P2P lending industry.
Nowadays, P2P lending is no longer a niche asset class and is considered a must-have in investors’ portfolio.
The high returns, steady monthly income and low volatility make it an attractive option for investors who are looking to diversify their investments and get returns that are higher than savings accounts or even the stock market.
As the P2P lending sector grows, it’s likely to become an even more important part of the ideal investors portfolio.
The future of the P2P investing industry
The P2P lending industry has been on quite a journey, and the success of the business model means it has quickly spread across continents and countries.
The Coronavirus pandemic served as a good test of the industry.
At the time, the question on everyone’s lips was: “Could it survive a market crash?”.
The answer is: yes.
In fact, the recent recession only bolstered the P2P lending industry, as banks have had to tighten their lending criteria even further forcing businesses and consumers to look at alternative lending.
According to an Altfi survey, 73% European alternative lenders continued hiring throughout the pandemic and small businesses and consumers are still using alternative lenders to access finance.
The other good news is regulation.
Countries are putting together regulations that help make the P2P industry safer, while still allowing people access to loans. The UK has set up an investment vehicle called the “IFISA”, specifically for alternative lending, and all UK based P2P platforms must be regulated by the FCA. This is a good thing, as it helps promote and legitimise the industry.
On the investment side, interest rates on savings accounts are at 0.01%, or even negative — and it seems this won’t be changing any time soon. Investors are looking elsewhere to grow their wealth, and are met by cryptocurrencies, the stock market and now P2P lending.
There is still a lot of work to be done: raising funding is still a key obstacle to growth for SMEs, and banking restrictions are only getting tighter. The way we manage our money is changing, with digital payments and the “sharing economy” becoming the norm. All this points to the P2P lending industry fulfilling its 2027 prediction valuation — and possibly even more.
We believe alternative lending and P2P lending is the future of accessible finance.
As technology lowers cost and increases reach, finance becomes more accessible and therefore helps people set up businesses, buy houses and therefore grow the economy.
As a P2P lending investor, you’re essentially taking part in one of the largest movements of democratisation of finance.