When investing in peer to peer lending, it’s easy to become focused on loan defaults. But should we be looking at a more alarming problem first? Are peer to peer platforms profitable business operations and can they sustain?
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 is operating profitably which is why I continue to strongly recommend it. 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.
Soon, the non-government regulator Financial Companies Authority (FCA) will require all peer to peer platforms to have full regulatory in order to continue to operate. In order to receive the FCA’s approval, platforms will need to comply with expensive requests such as having an extremely secure website and hosting system. Secure IT’s systems are expensive so this will put financial strains on some of 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.