As we wave goodbye to 2016 and welcome the new and improved 2017, I think back to all the peer to peer lending changes that occurred in 365 short days. Peer to peer lending is one of the most fluid financial vehicles I’ve ever invested in and 2016 saw many changes as p2p continued to develop its identity within the financial world.
For me, here were some of the year’s highlights both good and bad.
In 2010, only eight known peer to peer platforms existed. By the end of 2016, more than 100 platforms were either operating or in the process of being launched. Obviously it’s not possible to invest in 100 platforms but the variety of platforms offers choices for all budget levels and sector tastes. This explosion in growth continued despite the many naysayers warning against peer to peer lending.
Wot No Isa?
I thought more ISA’s would have been available by the end of 2016 but this hasn’t happened. Most platforms are still in a holding pattern as they wait to obtain Full FCA Permission. Even some of the founding platforms such as Zopa and Ratesetter are still under interim permissions. The under staffed FCA has kept some platforms waiting months with little communication as to when Full Permission could be expected.
Creating an ISA is no easy task and involves regulatory and technical hurdles for platforms to overcome. I do expect to see some ISA’s from Landbay and Lending Works being rolled out in the first quarter of 2017.
From Feast To Famine
As new platforms launched, a familiar pattern consistently reared its head. Successful platforms such as Moneything and Collateral offered plenty of early loan supply but lender demand quickly increased and loan pieces became scarce. Soon, a quick mouse trigger finger was needed to obtain any loan pieces. Bid restrictions and pre-funding allocations soon followed. A visit to some of these platforms now will show a baron wasteland of inactive secondary markets or more simply put, lenders are hanging on to existing loans and new loan offerings are being snapped up in minutes.
For me it was interesting to see how quickly some of these newer platforms grew. New lenders were quick to trust new platforms and early adopters were rewarded with high interest paying loan products that are now hard to buy.
The Dreaded Interest Rate Cuts
In 2016, many lenders were disappointed to see some of their favourite platforms cutting their return rates. Ratesetter, Lending Works and the worst culprit, Wellesley & Co. all cut rates. Wellesley had too many lenders so the company slashed return rates to record lows. Early Ratesetter adopters were blessed with five year returns paying up to 8% but now this rate is South of 5%. Even the higher risk 12% platforms such as Saving Stream and Moneything were forced to offer lower cost interest loans to borrowers in order to stay competitive.
The Bank of England interest rate cuts aren’t solely to blame but certainly didn’t help. As bank savings rates fell to dismal rates, savers looked elsewhere for yields and an excessive money supply and a healthy increase in platform competition led borrowers to shop around for the most attractive interest rates.
As peer to peer lending increases in popularity, it’s a safe bet that rates could be headed even lower.
A New Player Solved A Huge Diversity Issue
If you invest in multiple lending platforms like I do, you’ll sympathise with how time consuming managing your loans can be. Bondmason solved this problem by developing a completely hands-off peer to peer lending product that automatically lent investors money over multiple loans offered by multiple platforms. Bondmanson’s early return projections were almost as good as the manual investing products of other platforms. Bondmason wasn’t the first to offer a hands-off product as some of the bigger platforms were offering such products, but Bondmason’s rates were better and they invested in other platforms peer to peer loans creating a more diverse portfolio. There’s no guarantee Bondmason’s rates will stay so attractive and investing comes with its own set of risks, but so far I’m liking their offering.
A Platform Acted Completely Responsibly
Sometimes it’s impossible to know what peer to peer platforms are up to as they can be shrouded in mystery. One platform went against the grain and acted transparently and responsibly. Hats off to Zopa for acting in its lenders best interests in late 2016, when it shut down lenders deposits due to an oversupply of lender funds and an undersupply of quality loans and borrowers. By doing so, Zopa protected its underwriting standards because if it accepted more lender money, it might have been forced to take higher risk loans to place lenders funds. Such a proactive approach was refreshing to see and one that made me invest in Zopa despite them operating at a loss.
Another Platform Bites The Dust
In October 2015, the publicly traded peer to peer lending platform Trustbuddy filed for bankruptcy. A platform bankruptcy is never a good thing for lender confidence, especially when reports of suspected misconduct surfaced. But Trustbuddy’s failure didn’t seem to put lenders off throwing their hard earned cash at the multitude of alternative existing platforms. In 2016, it was reported that Trustbuddy lenders would receive 25% of their capital while a private group of lenders formed their own collection group to recoup loan payments. I wonder how many Turstbuddy customers are still invested in peer to peer? I’d say quite a high percentage.
Brexit Oh Brexit
I was shocked when I awoke to the news that the Brits wanted out of the EU. Originally I was in favour of staying in but after further thinking, I was opposed even though I think the masses were falsely sold on the Brexit benefits. Personal Brexit feelings aside, I was concerned how the Brexit news would affect the peer to peer lending sector. Saving Stream was the only platform I saw to have excessive selling activity but even this was short lived. As the news settled and investors realised Brexit would have little affect short term, Saving Stream’s secondary market glut evaporated.
Only time will tell whether or not Brexit will affect peer to peer lending long term.
Lord Turner Slams Peer To Peer
It’s not unusual to hear some negativity from folks who don’t understand peer to peer lending, but the former FCA head Lord Turner really let peer to peer have it.
Turner declared, “Losses which will emerge from peer-to-peer lending over the next five to 10 years will make the bankers look like lending geniuses.”
He later stated he thought the comment was made off the record at the end of an interview and that, “…the direct lending industry will play a useful role in our overall credit supply system.”
Firstly of all it’s hard to place any weight into what comes out of a Lord’s mouth. Secondly Lord Turner might be right but only in the worst of case scenarios. If the people running the peer to peer lending platforms do so in an underhanded manner (see Trustbuddy), peer to peer lenders might end up with some rotten eggs on their faces. But that’s like saying, if the stock market crashes, people who buy stocks will be sorry. In other words, there’s no way to tell what the future holds. Any company at any time can fall prey to poor decision making (Blockbuster, HMV, Kodak, Comet, Enron, VW, BP etc.).
Personally from what I know of the very capable people running the peer to peer lending companies, I have high hopes that their underwriting standards will remain in tact, they will remain or become profitable and this innovative and exciting financial sector will continue to flourish.
Having said that, it’s still essential to spread money across multiple platforms in case of failure.
What Can We Expect in 2017?
With the uncertainty in the financial markets, more and more people will flock to peer to peer lending in search of higher returns to offset dismal savings rates. Growth will be fueled by the introduction of the ISA, especially for the more user-friendly lending sites such as Ratesetter, Landbay, Zopa and Lending Works. These sites are easy to use and require limited hands-on attention which will appeal to the public. More specialised business lending sites such as Assetz Capital and Lending Crowd might not experience the same consumer growth as they are more difficult for the average person to understand and learn.
I continue to optimistically hope all platforms can be run profitably and run honestly. A Trustbuddy type failure in the UK could be disastrous to both consumer confidence and the peer to peer lending sector as a whole.
Interest rates will probably continue to remain low for 2017 and lender returns may fall further as platforms fight to attract new borrowers.
What’s My 2017 Strategy?
For those lucky enough to experience the higher pre-2016 lending returns, we wonder if some platforms are still worth the risk. But saving rates are dismal and don’t show signs of improvement. The U.S. stock markets are trading at all time highs while looking overvalued and over bought. Property has an expensive entry point that most savers can’t enter. Many peer to peer platforms will continue to attract new lenders even with sub-optimal interest rate offerings. Lenders are faced with extremely limited alternatives outside of peer to peer.
My personal strategy will be to remain diversified and to watch the platforms for signs of changes and adjust as needed. I will continue to reinvest interest payments within peer to peer but my current allocation amount will remain steady.
I will post anything I discover which might affect your investments.
My Top 3 platforms:
Here are the platforms I exited in 2016 and why:
Wellesley & Co.: Slashed their lender interest rates so I immediately sold my loans.
Rebuilding Society: Disappointed me with their defaults and made me question underwriting quality
Funding Circle: Cut their lenders interest rates so I exited in favour of Assetz Capital and other higher paying platforms with lower risk.
Fruitful: They closed down their peer to peer lending product
Lending Crowd: Disappointed me with their defaults and made me question underwriting quality
Bondora: The mouthwatering interest rates weren’t enough to offset the high risk.
Outside of peer to peer I continue to stay the course and invest in index tracker funds only. I’m approaching 44 years old and retirement still seems far-fetched.
In the meantime I continue to wander second shops looking for that ever elusive crystal ball :).
Until I can read the future, I’ll continue to believe 2017 will be a wonderful and prosperous year for all Financial Thing readers and I look forward to us all winning at the investing game together.