Marketplace Lending Index 

 25 November 2019 / Link Group

Property drives marketplace lending to new high, but record losses drag on returns.

Marketplace lending hit a record £3.0bn in the first half of the year, despite record loss rates in the sector[1],  according to Link Group’s latest Marketplace Lending Index, powered by Brismo.

The value of gross marketplace lending conducted by tech-enabled platforms (which includes crowdfunded or peer-to-peer loans) rose by more than £500m in the first half of the year, up 21.6%. This followed unexpectedly high lending of £1.5bn in Q2 2019, up 24.3% year on year. Marketplace platforms are collectively lending £16m a day.

The sector’s performance in the first half of 2019 was powered by an exceptional period of growth for property lenders – they accounted for three-fifths of the additional lending in the first half of the year. In spite of the very public collapse of Lendy, and a sluggish housing market, property lending totalled £848m in the first half of the year, up by 54.5%. This contrasts with the performance of the wider mortgage market, suggesting marketplace lenders are increasing their market share among traditional or mainstream lenders. LendInvest and Landbay were key drivers of growth. Both more than doubled their lending in the first half of 2019, collectively originating £335m more than over the same period in 2018.

Business lending, which involves companies borrowing to invest, buy new premises, make acquisitions, or refinance, as well as invoice finance, totalled £1.1bn in the first six months of 2019.[2] This represented a rise of 14.5%, slower than the 17.4% growth seen a year ago. This reflects the wider economic malaise, and the uncertainty Brexit is placing on businesses’ decision-making on investment. Consumer lending, frequently used for large-scale discretionary spending, home improvement or debt consolidation, saw slower growth still. It rose by just 9.4% in the first half of the year, climbing to £990m, reflecting weaker consumer spending.

To build a true picture of the investment performance of marketplace loans for investors, returns must account for fees, costs, term length, and losses. Accounting for these factors, the Link/Brismo Marketplace Lending index shows that the net return on a typical loan now stands at 3.8%, the lowest on record. This has fallen from 5.5% in the second quarter of 2017, and is now a distance from its most recent peak of 6.3% in 2016.

The rising loss rates on loans has driven down net returns. Losses currently reduce the net return by 3.4 percentage points – the highest level on our record. This compares to a year ago, when losses reduced returns by 2.1 percentage points. A weaker economic environment has been a key factor, undermining a growing minority of businesses and consumers’ ability to repay loans. Furthermore, as they grew rapidly, several lenders increased their exposure to riskier borrowers, which has naturally impacted loss rates. The trend of rising losses continues to be exacerbated by the dwindling usage of contingency funds among platforms, exposing more loans to losses.[3]

The second component in net returns is the net yield (which accounts for the initial interest rate and platform fees). This has remained steady at 7.2%. Although risk has increased in the sector, growing competition among lenders has also created a tougher pricing environment. This has limited lenders’ ability to compensate investors for increasing risk.

Despite the impact of rising loss rates, returns remain healthy compared to other fixed income assets of a comparable term, which should underpin demand. While the economic and political uncertainty has the potential to weigh on the sector, Link/Brismo currently forecasts gross lending will total £6.2bn in 2019, representing annual growth of 16.7%.

Mark Davies, Managing Director of Link Mortgages Services, said: “Peer-to-peer and marketplace lending has witnessed a tumultuous year so far. The sector has been beset by controversy, not least by Lendy’s fall into administration. Economic and political uncertainty has provided a more troubling backdrop for consumer and business lending too, and losses have risen. In spite of all this, marketplace lending continues to grow as platforms cover the funding gap left by traditional banks.  

“More change is coming. Tighter regulation requires clearer disclosure on performance, more robust risk management, and restricts lending to retail investors. This will reassure the large-scale institutional investors that are vital to platforms building a more diverse funding base, and it should support long-term, sustainable growth.  

“However, as losses rise, and the potential for an economic downturn looms on the horizon, it is clear that marketplace lenders are heading into new territory. Should we see the economy slow further, the risk management, loan-servicing and recovery practices they have in place are likely to face significant testing across the board for the first time.”

Rupert Taylor, Chief Executive of Brismo, comments:

“Whilst marketplace lenders are working hard to adopt new FCA requirements there is, in parallel, an increasingly widespread acknowledgment that, investors of all types need to be able to compare performance.

The Link Marketplace lending index demonstrates how performance can be compared and we will continue to develop our methodologies to provide investors with the insights they need to make commitments to the lending asset class.”

Matt Adey, Director of Economics, British Business Bank, comments:

“We know that high-quality information and reporting is important for the effective operation of smaller business finance markets.

Reports on particular finance types, such as Brismo’s latest Marketplace Lending Index, provide a valuable contribution to the market’s understanding of how these areas of funding are performing, and we welcome its publication today.”

Paul Smee, Chair of the P2PFA comments:

“As sectors evolve and expand their influence and impact, and as regulators become more interested in them, there is an almost inevitable interest amongst stakeholders in how standard descriptions and measurements can similarly evolve.”

[1] Link/Brismo has revised the historic data series for lending volumes to account for changes to the constituents of its index. Brismo’s data set includes 31 constituents, up from 28 last year, accounting for c.80% of all gross lending in the sector.

[2] Following the changes to the constituents of the index, Brismo has amalgamated the invoice finance and business lending sectors

[3] Following the FCA’s latest policy statement (PS19/14) lenders will be expected to report loss information without the mitigating effects of a payment from a contingency fund. To reflect this change, from next year, the Link/Brismo Marketplace Lending index will only detail pre-contingency fund performance data.

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