When investing in peer to peer lending, it’s easy to become focused on loan defaults. But we should also be looking at a more alarming problem. Can peer to peer lending companies be profitable and thrive?
I believe peer to peer lending provides a much-needed gap in the financial markets but as we have seen through the failures of both Collateral (operating outside of regulatory permissions) and Lendy (financially failed), operating a profitable company is difficult.
If the platform can’t turn a profit, then it’s unlikely the business will survive it’s peer to peer loan terms. Thanks to interesting data collected from the annual reports filed on Companies House’s website (thanks to c88dnf), I was surprised by the numbers:
As you can see, Funding Circle and Zopa are far from profitable. In fact in its annual report, Funding Circle it states it will need to keep borrowing to continue its growth and operational. Ratesetter informed me they hoped to be profitable in 2020. Some of the younger peer to peer lending companies have short histories so it’s too early to tell how they’ll shape up financially but most are operating in the red.
The government approved regulator Financial Companies Authority (FCA) requires all peer to peer platforms to have full regulatory permissions to operate. In order to receive the FCA’s approval, platforms will need to comply with conditions. Secure IT’s systems are expensive so this could put financial strains on the smaller peer to peer companies. I believe some of these companies may not be able to overcome the cost of compliance and may cease to exist.
It’s important to keep this in the back of your mind when investing in peer to peer. Sometimes the outside of the business looks rosy but when you look at the actual numbers, even the larger companies won’t be immune to failure if they can’t turn a profit.