Peer2Peer Finance News August 2023

are there so few P2P platforms in the US?

Platforms gear up for battle against banks

PEER-TO-PEER lending platforms are raising their target returns in order to compete with banks in a higher-interestrate environment.

Following a series of base rate hikes, high street banks have begun to raise the rates offered on standard savings accounts. By mid-July, a number of instant and easy access savings accounts were offering savers 4.5 per cent, while a two-year cash ISA was paying 5.8 per cent.

In the previous era of historically low interest rates, P2P lenders were able to beat the highest bank rates by at least a few percentage points. However, the gap between bank returns and P2P returns has begun to narrow.

According to the latest Peer2Peer Finance News data, the average Innovative Finance ISA (IFISA) was offering target returns of 8.86 per cent in July 2023. At least seven IFISA providers were promoting target rates of 5.8 per cent or lower.

However, platforms have begun to review their offerings as the competition for investor money heats up.

“Investors have much more choice at the moment, which is fair enough as they have had to live with low interest rates for many years,” said Chris Brown, head of lending and operations at P2P pawnbroking platform Unbolted.

“We have increased our

target lender rate already this year from 7.8 per cent to 10.2 per cent and continue to monitor.

“Bank savings aren’t really a direct competitor, they’re a different product, but P2P needs to offer a good premium over and above what the average customer can get on a one-year fixed savings rate on the high street. At the moment that looks like around 5.25 per cent per annum, so

our 10.2 per cent offers value for an appropriate proportion of an investor's available capital – it’s all about diversification.”

Unbolted is just one of the P2P firms that has opted to increase its target returns following the Bank of England’s monetary tightening.

Soon after the central bank raised the base rate to five per cent in June, property lender easyMoney hiked >>

THE ROBOTS ARE TAKING OVER How AI could change the industry’s future

STAR-SPANGLED OPPORTUNITY

Why

HeavyFinance’s Darius Verseckas on saving the planet, one green loan at a time 16 >>

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EDITORIAL

Suzie Neuwirth

Editor-in-Chief suzie@p2pfinancenews.co.uk

Kathryn Gaw

Contributing Editor kathryn@p2pfinancenews.co.uk

Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk

PRODUCTION

Tim Parker

Art Director

COMMERCIAL

Tehmeena Khan Sales and Marketing Manager tehmeena@p2pfinancenews.co.uk

SUBSCRIPTIONS AND DISTRIBUTION tehmeena@p2pfinancenews.co.uk

Find our website at www.p2pfinancenews.co.uk

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Peer2Peer Finance News has been prepared solely for informational purposes, and is not a solicitation of an offer to buy or sell any peer-to-peer finance product, or any other security, product, service or investment. This publication does not purport to contain all relevant information which you may need to take into account before making a decision on any finance or investment matter. The opinions expressed in this publication do not constitute investment advice and independent advice should be sought where appropriate. Neither the information in this publication, nor any opinion contained in this publication constitutes a solicitation or offer to provide any investment advice or service.

Last month, Collateral directors Andrew and Peter Currie were sentenced to prison for fraud and money laundering, after one of the biggest peer-to-peer lending scandals in UK history.

The P2P pawnbroking platform fell into administration in 2018, after fraudulently claiming it was authorised by the Financial Conduct Authority (FCA) and siphoning off client funds.

The flagrant dishonesty of the Curries is astounding and while their sentencing will be welcomed by Collateral investors, it is unlikely to make up for their lost money.

The FCA has embarked on compensation proceedings but has already warned that almost two thirds of the outstanding loan book cannot be recovered.

The other point to raise from the Collateral scandal is the FCA’s failure to oversee its financial services register adequately, enabling Peter Currie to swap out the name of another company with Collateral’s so it appeared regulated. The FCA says it has “invested heavily in the register to strengthen controls” since then, which again is unlikely to cheer Collateral investors who put money into the platform in good faith.

Stricter regulations on the P2P sector will hopefully weed out the bad actors, but only as long as the body enforcing the rules is doing a good enough job.

SUZIE NEUWIRTH EDITOR-IN-CHIEF

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cont. from page 1

its rates for the fourth time this year. For investments of £100 or more, the new target rate is 5.28 per cent. For investments of £20,000 or more, the new rate is 6.27 per cent, and for £100,000 or more, it is now 7.26 per cent.

Folk2Folk has raised its target returns from 6.5 per cent to 8.75 per cent, while CrowdProperty increased its target returns to between eight and nine per cent in May, before hiking them again to 10.5 per cent in July.

“The UK remains in

a higher interest rate environment, with inflation remaining stubborn,” said a CrowdProperty spokesperson.

“Recent headlines have been centred around businesses (including some of the country’s biggest banks) being challenged on profiteering in this market by dragging their feet on updating their customer offers – whether on savings rates, prices at the pump, or on the supermarket shelves. As a leader in the industry, CrowdProperty is constantly reviewing

evolving market needs, risks and pricing to ensure the business is providing the best value to its customers.”

Some P2P stakeholders have claimed that higher rates are necessary to attract new investors, especially after investor incentives were banned in the latest swathe of stricter rules on the sector.

While UK platforms can no longer offer refer-afriend and cashback offers in a bid to compete with bank savings rates, their overseas counterparts are making the most of these

to enhance their investor proposition further.

Last month, Dublinbased lending marketplace Lendermarket rolled out a five per cent cashback offer, saying that “the primary reason behind this move can be traced to the recent changes in the risk-free interest rates by the central bank.”

The platform noted that the base rate rises had “sparked a heightened level of competition amongst retail banks, as they strive to keep pace by increasing their deposit interest rates.”

The Bank of England versus inflation

THE BANK of England has increased the base rate 12 times since December 2021, taking it from a historic low of 0.1 per cent to five per cent in June this year.

The central bank has done this in a bid to tame inflation, which was 7.9 per cent on an annualised basis in June – far above the Bank’s two per cent target.

Economists and traders are expecting further base rate hikes this year, to at least 5.75 per cent.

While banks are typically much quicker at passing on higher rates to borrowers rather than savers, savings rates

have still edged up.

Coventry Building Society is offering a 4.5 per cent interest rate on its easy access account, according to MoneySavingExpert

as of 20 July. For people happy to lock up their money for a while, Vanquis Bank is offering 5.35 per cent with 90 days’ notice.

And for a six-month

fix, Secure Trust Bank and Monument Bank are both offering 5.45 per cent, according to MoneySavingExpert.

Rates can go above six per cent for twoand three-year fixed savings accounts.

Savings in bank accounts are protected by the financial services compensation scheme up to £85,000, unlike investments which are not protected in the case of losses.

As a result, many consumers have opted to keep their money in these savings accounts rather than take a risk elsewhere.

Bristow: Secondary markets are “dangerous”

CROWDPROPERTY’S chief executive has said that access to secondary markets is not a major selling point to peer-topeer investors, and may even be “dangerous”.

Mike Bristow (pictured) said that the P2P development platform learned through its own investor research that asking for secondary market access is “quite low down” on investors’ list of priorities. He added that the presence of a secondary marketplace could actually harm investors by giving them a false sense of liquidity.

“Bigger picture, secondary markets are dangerous,” Bristow said.

“This is why we will not have a secondary market.

“The presence of a secondary market doesn't mean liquidity. There are so many challenges around availability and pricing, for instance.”

He noted that investors

who buy property loans on a secondary market can miss some of the details of the deal, creating “information asymmetry.”

“These are real problems with secondary markets,” Bristow said. “So this is a dynamite area.”

HeavyFinance targets €5m green loan book by end of 2023

HEAVYFINANCE expects its green loan book to reach more than €5m (£4.3m) by the end of the year, as it targets growth in sustainable finance.

The Lithuanian peerto-peer lending platform, which supports farmers in five different European countries, has expanded from offering agricultural loans for things like land and equipment to “green loans”, which encourage eco-friendly farming.

The green loans, which were launched earlier this year, enable farmers to earn carbon credits based on their emissions, which can be sold to traders or other companies.

Investors earn returns from the loan itself and the sale price of the carbon credit.

HeavyFinance closed a €3m fundraising round in March to help the platform expand its green loan offering.

Darius Verseckas,

co-founder and chief marketing officer of HeavyFinance, revealed that the platform has already funded more than €2m of green loans and is targeting more than €5m by the end of 2023.

“We still have in mind that the project is quite new so we want to evaluate every step of the process,” Verseckas said.

“This year is about working together with the farmers, explaining how sustainable products

Rather than relying on a secondary market for liquidity, Bristow said that his investors are encouraged to diversify their investments across several different loans.

“People know and we explained very clearly that they will get paid back at the end of that project,” he added.

“Good practice is to diversify. And that is the core offering of CrowdProperty.”

Last month, CrowdProperty passed £400m in facilities agreed. The property lender has funded more than 3,000 homes to date, for £713m worth of properties.

work and next year will be the time to reach a much bigger scale.

“Our green loans will become the biggest product in the longterm. There is a lot of meaning to it and it is basically our mission now with sustainable farming and helping the environment. A lot of capital is going into this area because of the urgency of it. We are also in talks with institutional capital providers who want to support this work.”

Go to page 16 to read the full interview with Verseckas.

•

Nominations open for Peer2Peer Finance Awards

NOMINATIONS

are now open for this year’s Peer2Peer Finance Awards, with new categories added to reflect the wide range of property lenders in the sector.

The Peer2Peer Finance Awards 2023 will take place on 12 December at the Hurlingham Club in London, with the winners to be announced on the night.

This year’s awards will build on the success of last year’s inaugural event, while once again celebrating the

achievements of the peerto-peer lending industry.

Accolades will include P2P Lending Platform of the Year, Innovative Lender of the Year and Ethical Lender of the Year.

New categories include Commercial Property Lender of the Year, Residential Property Lender of the Year and Property Lender of the Year.

“We’re delighted to unveil this year’s categories for the Peer2Peer Finance Awards, which will

recognise the best and brightest stars of the peer-to-peer lending sector,” said Peer2Peer Finance News editor-inchief Suzie Neuwirth.

“The quality of nominations was incredibly high last year and we’re looking forward to seeing what this year brings.

“The addition of new property categories is our response to the evolution of the industry, as property lenders now dominate the P2P space and we felt our awards needed to reflect that.

“We have also introduced a Property Lender of the Year award to recognise the best platform across all segments of the property market.”

Go to p2pfinancenews. co.uk/category/awards for more information on this year’s event and how to submit a nomination, or email sales and marketing manager Tehmeena Khan at tehmeena@ p2pfinancenews.co.uk for more information.

The deadline for nominations is 8 September 2023.

How AI could change the future of P2P

THE USE of Artificial Intelligence (AI) could change the way peerto-peer lending is done in the future, leading to streamlined processes and possible regulatory upheaval, industry stakeholders have claimed.

As the use of AI in the financial services sector grows, several P2P industry stakeholders have been debating the use cases of the technology and how it can shape the future of P2P.

Last year, Kuflink stated that AI is “the next frontier for lending”, and said that it had already begun building support algorithms to predict

future trends based on historical data.

Meanwhile, Qardus uses machine learning for its credit risk scoring, and Crowd2Fund’s automated investing tool SmartInvest incorporates AI.

Bruce Davis, co-founder and managing director of Abundance Investments, said that AI has a place in the P2P landscape, but with certain limitations.

“It is definitely something which will be

changing how we do things in the future,” he said.

“The ability to tailor content and be creative in a way that is scalable is something to explore and we are already seeing offerings to simplify the production of contracts and other investment documentation, which would certainly be worth considering when you have predictable and relatively straightforward lending terms.

“I’m not sure it is a revolution but it will certainly mean changes to the relative productivity and efficiency of P2P and crowdfunding companies.”

However, Lee Birkett, founder and chief executive of JustUs, warned that using AI on lending platforms could potentially pose a regulatory risk.

“If AI recommends certain financial products to investors it can be viewed as a form of advice,” he said.

“The use of AI could be classed as a promotion if it leads to a product outcome.”

These are extraordinary times and our team is working hard to keep you informed about how the UK’s P2P sector is responding and what new trends are starting to emerge.

If you want to be the first to learn about the latest developments in the world of P2P, please purchase a subscription today.

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For more information on subscriptions, including overseas queries, please email tehmeena@p2pfinancenews.co.uk.

It has never been more important to keep up to date with the latest peer-to-peer lending news.

Easy access accounts on the decline amid regulatory scrutiny

EASY access accounts were once the norm among UK peerto-peer lenders, but today just three platforms offer them.

Once feted as an answer to the question of liquidity, easy access accounts allow investors to withdraw their money at short notice, often within hours of making a withdrawal request. In return for this, the advertised returns are often lower than other accounts.

However, in recent years the number of easy access P2P accounts has dropped significantly, partly due to the consolidation of the P2P sector itself, and party due to stringent new regulations on how to handle retail investor money.

For example, in 2022 the Financial Conduct Authority (FCA) introduced new financial promotion rules for high-risk investments. P2P loans were included in this description. The rules require all platforms to post a warning to investors on their website, stating that “you may not be able to access your money easily and are unlikely to be protected if something goes wrong.”

The FCA has been notoriously particular about the wording of these risk warnings, and several platforms have opted to change the structure of their investment offerings in order to remain compliant.

While easy access accounts have fallen off, alternative liquidity solutions have been mooted. Secondary markets have been introduced to give investors a means of selling off their loan parts to

other lenders. And many platforms allow investors to withdraw their money following a short notice period. This notice period can range from days to months, depending on the account in question.

But when it comes to the classic definition of an easy access account – a P2P investor account where money can be withdrawn or added at any time – there are just three options available today.

1. easyMoney

The property lender has three different investor account options, which vary in terms of the minimum investment threshold and the returns offered. Target investor returns range from 5.28 per cent to eight per cent, with high net worth investors receiving the best rates.

On all three of easyMoney’s accounts, the lender offers the option to withdraw at any time. While instant access is not guaranteed, over the past 12 months the platform has made

withdrawals available in less than 24 hours, on average.

2. JustUs

JustUs offers four account options, one of which is an ‘access’ account where money can be withdrawn without any notice. The access account effectively acts as a cash holding account and pays interest equivalent to 1.2 per cent per annum.

However, in order to use the account, investors must choose at least one other investment option on the JustUs platform. The other accounts have much higher target returns, but come with a higher degree of risk. The ‘prudent’ account targets returns of up to 5.32 per cent per annum, while the ‘balanced’ account targets 8.13 per cent. The highest-risk option is the ‘adventurous’ account, which targets 10.98 per cent per year.

3. Loanpad

Loanpad offers daily access to investor funds on two of its four accounts. The property lender has a classic account and an ISAfriendly version of its classic account, both of which target 4.8 per cent in annual returns. Investors can get daily access to these funds, although the platform says that “access times are based on expected market conditions and cannot be guaranteed.”

Loanpad’s other two accounts – the premium and ISA premium – require 60 days’ notice for withdrawals, and target 5.8 per cent in annual returns.

How higher investment thresholds can protect peer-to-peer investors

PEER-TO-PEER

lending platforms can protect vulnerable investors by setting higher minimum investment thresholds, says Gurbinder Ghuman (pictured), head of investor relations at Kuflink.

The property lender increased its minimum investment threshold from £100 to £1,000 last month in an effort to enhance its investor process.

Ghuman says that the decision was made over a number of months, as multiple interest rate rises heaped pressure on borrowers up and down the country. These rate hikes have increased the risk of defaults for lenders, which in turn increases the risk for investors in P2P and other types of loans.

Kuflink has tightened its borrowing criteria in recent months in an effort to manage this risk, but the company is now turning its attention towards its investors.

Kuflink intends to regularly circulate investor surveys to learn more about its investor expectations and investing behaviours.

“We want to ensure our investors understand the risk of a delay in repayment, if a loan term has to be renegotiated,” says Ghuman.

“We don’t want to be in a position where our investors would struggle if there was a delay in a loan repayment.

“Especially these days when inflation is high. So we decided to up the minimum to £1,000 to

ensure that only suitable investors join the Kuflink platform.”

Ghuman notes that the recently introduced Financial Conduct Authority (FCA) rules inspired the platform to take a closer look at its user base and take a more proactive approach to investor protection.

“The FCA rules are always at the forefront of our mind,” he says.

“But it’s also what is going on with the rising cost of living. We have a secondary market that has at times been quite busy and we’re trying to help as many clients as possible take control of their money.

“Not all borrowers will pay back on time. The reality is that rising interest rates have changed the dynamics of the market and some of our borrowers have had to completely change their investment strategy and request loan extensions or refinancing.”

The £1,000 minimum threshold

applies only to new investors. Existing investors can continue to reinvest smaller sums, although Kuflink is considering introducing a £500 minimum for reinvestment.

“At the moment the system allows you to invest/reinvest smaller amounts in select-invest as long as it equates to 1p of interest for the month,” Ghuman explains. “You can imagine the amount of work that it takes across the business when you have someone who invests less than £5 at a time.”

Ghuman says that the response to the increased investment minimum has been mostly positive, as the vast majority of the platform’s investors understand that the regulatory landscape is changing and new market risks are emerging.

Ultimately the higher investment values will help Kuflink to deliver a more efficient, compliant and protected business no matter what the economy does next.

Land of opportunity

The US dominates the global alternative lending market, but where are all the peer-to-peer lending platforms?

ALTERNATIVE LENDING is flourishing in the US.

According to a recent

By Kathryn Gaw

report from Allied Market Research, the global alternative finance industry generated

$173.9bn (£134.42bn) in 2022, with North America accounting for almost two fifths of this.

The report predicted that by 2032, the alternatives market will generate $920.9bn, and North America will continue to dominate the sector.

Yet peer-to-peer lending represents a small fragment of this enormous market. In fact, if we take the UK definition of P2P lending – loans funded by retail investors made on a regulated platform – there is just one

lender in the US P2P market.

With a loan book value of more than $23bn, Prosper’s business is worth more than the entire UK P2P lending market combined. Like most US-based fintechs, it is headquartered in San Francisco. It offers both consumer and business loans, and is funded by a mix of both retail and institutional investors.

Given the demand for alternative

finance in the US, and the success of Prosper’s business model, it is surprising that there is not more competition in the US P2P market. There are a few reasons behind this.

The first is regulation. The US P2P sector is regulated at both a federal and a state level. At the federal level, the Securities and Exchange Commission (SEC) oversees investor protections, while the Consumer Protection Financial Bureau with the Federal State Trade Commission has oversight over the borrower side.

Platforms are subject to further regulation under the laws of the state in which they are headquartered.

This creates a complicated administrative burden which can only be managed by a sizable team of highly-trained staff. Naturally, this makes it harder for smaller players to enter the market, unless they have hefty funding behind them and a wealth of regulatory and legal expertise.

In 2008, the SEC passed a law requiring all P2P platforms to list their offerings as securities, rather than loans. This was the first time that the sector came under regulatory scrutiny, and it led to a slowdown in the growth of the sector. At that stage, a handful of P2P startups had sprung up, mainly around Silicon Valley. Largely specialising in offering consumer loans to people with poor credit, these platforms were beset with high default rates from the start.

More damningly, in 2021

“ The market has shrunk beyond recognition”

the SEC introduced a new rule which means that American P2P lending platforms are not permitted to issue loans directly with money provided by lenders. Unsurprisingly, this led many P2P platforms to exit the retail market and pivot towards institutionallyfunded lending instead.

LendingClub was a prime example of this. It left the retail market in 2020 ahead of the new SEC rule. At its peak, LendingClub was the world’s largest P2P lending platform, offering both consumer and motor loans. In 2014, it raised $1bn to launch the largest technology initial public offering of the year in the US. However, a series of scandals involving former chief executive Renaud Laplanche saw the company’s share price plunge.

In February 2020 LendingClub announced that it had agreed to buy Radius Bank for $185m, which allowed the platform to rebrand itself as an online bank, marking the official end of its P2P journey.

Over the years, several other P2P platforms have gone a similar route. Sofi, Kiva and Lending Point have all stopped accepting retail money and shifted towards a balance sheet lending model

Who is Prosper?

There is just one firm in the US which meets the UK’s definition of peer-to-peer lending –Prosper.

Founded in 2005, Prosper was the first P2P lending marketplace in the US. It specialises in consumer loans and has delivered funding to more than 1.4 million people over the past 18 years.

Late last year, Prosper raised

instead. Peerform has stopped accepting retail money altogether. LendingTree has moved into the credit card space. StreetShares was acquired by software company Meridian Link, and Credit Karma was acquired by financial software firm Intuit.

Upstart has been able to bypass the SEC rules somewhat by inviting lenders to invest indirectly in its consumer loans via its referral business. Meanwhile Prosper has used state rules to its advantage, by accepting only those investors who are registered in a P2P-friendly state. Prosper is headquartered in San Francisco, California, and maintains an office in Plano, Texas, where investor regulations are more favourable for fintech lenders.

Funding Circle made a splashy entrance into the US market in 2013, and went on to originate more than $4bn of small business loans in the country. However, it has since become an institutional-only platform, with no access for retail investors.

Another reason why the US P2P market seems to have stalled has to do with borrower culture. Consumer borrowers overwhelmingly choose credit cards and bank loans to meet

$75m from a fund managed by Neuberger Berman, which it said will enable it to meet strong consumer demand for its personal loan, credit card, home equity and investment products.

• Total value of loan book: $23bn

• Average investor returns: 5.5 per cent (as of June 2023)

• Average borrower rates: 18 per cent (as of June 2023)

their lending needs. According to Experian, the average American has 3.84 credit cards, making consumer loans less relevant to the wider market.

Business borrowers are also well served by the mainstream lending market, alongside alternative lenders such as Funding Circle. The bridging market is extensive, offering quick financing to both businesses and property developers.

While the alternative lending market is booming in the US, there are still limited opportunities for retail investors. At present,

US investors have only one clear option if they want to invest in P2P loans – Prosper. While it is also possible to invest in P2P loans indirectly (for example, via Upstart), the barriers to entry remain high and awareness remains low.

Regulation and a culture of credit cards and mainstream lending has slowed the progress of P2P lending in the US in comparison

with the UK. While the sector got off to a strong start in 2005, almost 20 years later the market has shrunk beyond recognition. Even the term ‘P2P’ is losing its meaning, as American investors use the acronym interchangeably to describe everything from equity crowdfunding to crypto trading. However, the US market is immense and there are still gaps where traditional and alternative

financing cannot reach. Credit card debt is expensive and bridging loans are only intended to be used to cover short term cashflow issues. Access to affordable lending is particularly important during an economic downturn, and while the US economy is performing better than the UK’s, interest rates and inflation are still relatively high.

If they can navigate the complexities of US P2P regulations and reach their target investor base, the next generation of US P2P lenders could take a considerable market share of the $920.9bn alternatives sector.

“ The US P2P sector is regulated at both a federal and a state level”

The future is green

Darius Verseckas, co-founder and chief marketing officer of HeavyFinance, tells Marc Shoffman how his peer-to-peer lending platform is supporting farmers across Europe

PEER-TO-PEER LENDING platforms have always given investors access to a variety of sectors and HeavyFinance has developed an offering that lets users back Europe’s important agricultural industry while supporting the environment.

The Lithuania-based platform was launched in 2020 and lets investors provide muchneeded finance for farmers.

Its founders have plenty of P2P lending experience, including Laimonas Noreika, who started FinBee and former NEO Finance interim chief financial officer Andrius Liukaitis.

The platform has built a total loan book of €40m (£34.2m) and is targeting further growth, especially as it rolls out its green loans.

Co-founder and chief marketing officer Darius Verseckas explains how the platform is supporting sustainable farming and helping investors go green at the same time.

Marc Shoffman (MS): Why was HeavyFinance set up?

Darius Verseckas (DV): The agricultural sector is very attractive for investors. Farmers are heavily underfunded.

What we saw, especially after the financial crisis, is that the banking sector got stricter and stopped funding small- and medium-sized enterprises (SMEs). It is not that SMEs are even

getting higher borrowing rates, they are just not getting funding. There is a €40bn funding gap in agriculture across the EU. The sector has incredible potential to tackle climate change through methods such as organic fertilisers or covered crops that allow the soil to store C02 emissions. These techniques have the potential to

take agriculture from the third biggest polluter to a climate positive sector. We have launched green loans to help with this.

MS: How do your green loans work?

DV: Investors can help businesses generate carbon credits and make big returns out of doing a

good job for the environment.

We send scientists to every farm that takes a green loan. They take soil samples to analyse how much carbon is generated and then follow up a year or two later. We measure the difference and one tonne of C02 equals one carbon credit. This then generates a certificate that can be sold to traders or companies looking to offset their own emissions.

The investor gets returns from the loan and how much the carbon credit sells for, while HeavyFinance gets an administration fee from this as well.

MS: Who can invest?

DV: Anyone with an account in the EU can invest. The minimum investment is just €100. We do have some British investors but they aren’t in our top 10. The platform has roughly 9,000 investors, with most from Lithuania, France and Germany.

MS: How is HeavyFinance regulated?

DV: We are already regulated under Lithuanian rules and we are expecting to receive our panEuropean crowdfunding licence soon. [Editor's note: HeavyFinance received its EU licence on 20 July.]

It will be tougher for platforms in other countries where they didn’t have crowdfunding regulations prior to the new EU rules.

We see different platforms are taking different routes, for example in Latvia many firms are getting financial brokerage licences. In our case, there won’t be any significant differences under the new regulations, we see it as a good thing for the company.

MS: Where do you invest?

DV: We originate loans directly from five markets: Lithuania, Latvia, Poland, Bulgaria and Portugal.

Farmers are just like other businesses. They have profit and loss statements and balance sheets. We analyse their business data, how many years they have operated, and whether there are any commitments they are late on. There are 20 data points we evaluate.

When people are investing in agricultural loans, it is not investing against collateral, it is investing against business. If there is a need for recovery, we are tackling the business first.

The interesting part of agriculture is that even though farmers operate as companies, they are personally liable. If they are thinking about taking a loan, they think about it very hard. That provides an important layer of security for investors.

MS: Have you taken any inspiration from the UK P2P lending market?

DV: We did some analysis of the UK market and how they present projects. It is the most mature market in Europe so is definitely worth following. There are differences in the regulatory framework though that makes it harder for us to enter.

MS: What is your outlook for the P2P lending sector?

DV: I think crowdfunding markets in real estate may be under pressure because of the economic environment.

We see agriculture as a different sector from all others. One reason is because of the security of it. We

cannot as a continent afford to be starving so we can’t let this sector die. As Europeans, we will always be trying to save this sector.

We are actually seeing an increase in investor registrations. Investing in agriculture is seen as a way to diversify a portfolio.

MS: What are your plans for the future?

DV: We closed a €3m fundraising round in March. That round was aimed at helping us to expand our green loans. We launched them early this year and have already funded more than €2m. We are expecting our green loan book to reach more than €5m by end of the year.

We still have in mind that the project is quite new so we want to evaluate every step of the process. This year is about working together with the farmers, explaining how sustainable products work and next year will be the time to reach a much bigger scale.

The €3m we raised is enough to expand for some time, but next year we may consider another venture capital round.

Our most recently published financial statements showed some losses. We are operating as a typical tech start-up. The business is going through rapid expansion so we won’t see profits for several years.

Our green loans will become the biggest product in the longterm. There is a lot of meaning to it and it is basically our mission now with sustainable farming and helping the environment. A lot of capital is going into this area because of the urgency of it. We are also in talks with institutional capital providers who want to support this work.

Under-consumed

The consumer lending market is in high demand, but challenges remain for the few peer-to-peer lenders who remain in the space. Kathryn Gaw reports…

IF YOU HAVE BEEN PAYING attention to the personal finance pages, you will know that there is a new consumer credit crisis brewing.

The rising cost of living, paired with the higher base rate and low wage growth means that many households are struggling to make ends meet.

Earlier this year, data from the Office for National Statistics (ONS) revealed that more than a fifth of adults in Great Britain increased their borrowing, year-on-year. This equates to approximately 11.5 million consumers. Almost a third of those surveyed by the ONS said that they would be unable to afford an unexpected expense without

access to consumer credit options.

According to the most recent Bank of England statistics, the average net borrowing statistics have remained stubbornly high since the start of 2022, split roughly 50/50 between personal loans and credit card debt. However, base rate rises mean that the cost of consumer borrowing is going up.

In May, average rates on credit cards reached 22.76 per cent – their highest level since December 1997. At the same time, overdraft charges hovered around 21.7 per cent. For consumer borrowers, the best rates are still being offered by banks, but these prices too are going up.

In May, the effective rate on new personal loans to individuals was 8.27 per cent, although the actual rate depends on the borrower’s credit score, and the terms of the loan. Just two years ago, it was possible to get a personal loan with an interest rate as low as 2.16 per cent.

The dramatic increase in the cost of credit has long-term repercussions for the consumer lending market, particularly among those who are relying on borrowing to stay on top of their day-to-day expenses.

“Demand is increasing as more people are being locked out of mainstream credit, but this predates the cost-of-living crisis,” says George Huntley, chief executive of The Money Platform.

“The number of people with access to a credit card or overdraft has been declining for several years

Consumer lenders and the rates they offer

There are just six UK-based peer-to-peer lenders specialising in consumer finance at present, with borrower rates ranging from 10 per cent APR to 504.7 per cent APR, depending on the value and length of the loan. They are…

1.

ELFIN MARKET

Elfin is a seven-year old consumer lender which claims to be 50 per cent cheaper than a credit card. Borrowers can apply for up to £2,000 via the Elfin Card, which is funded by the platform’s P2P investor community.

Borrower rates: 14.8 per cent representative APR

Investor returns: Eight to 12 per cent per annum.

2. FUND OURSELVES

Founded in 2015, Fund Ourselves specialises in short-term loans to consumers, for relatively small amounts. Borrowers can apply for loans of between £100 and £1,500, with repayments typically beginning 32 days after the money has been released.

Borrower rates: 504.7 per cent representative APR

Investor returns: Five to 15 per cent per annum

3.

LENDWISE

Specialising in education finance, Lendwise has carved out a niche in the P2P market, while also pitching itself as a socially-forward fintech business. Students can apply for funding for their

post-graduate studies, funded by retail investors.

Borrower rates: 10 per cent representative APR

Investor returns: Up to nine per cent per annum

4.

PLEND

Officially launched in 2022, Plend has already done huge borrower numbers, and has attracted the attention of several institutional investors. It offers loans of up to £10,000 to borrowers of all stripes, although it has yet to open up its platform to retail lenders.

Borrower rates: 17.99 per cent representative APR

Investor returns: Not yet open to retail investors

5. THE MONEY PLATFORM

This short term lender offers loans of up to £1,000 to creditworthy consumers. Earlier this year the platform announced plans to scale up its lending.

Borrower rates: 255.5 to 292 per cent representative APR

Investor returns: 6.3 per cent to 7.2 per cent per annum

6. UNBOLTED

Unbolted is a P2P pawnbroking platform, where high-value assets are held as collateral. It lends up to 80 per cent of the value of the asset, under the condition that the asset may be sold if the borrower defaults on the loan.

Borrower rates: 53 per cent representative APR

Investor returns: 10.2 per cent per annum

“ Experience has shown that it’s not easy to make standard consumer lending work in P2P ”

now. In research carried out before the Ukraine War, the Centre for Social Justice estimated that 1.08 million used illegal lenders – so demand for those excluded from mainstream finance has been at elevated levels for some time.”

This demand is being met by a range of alternative consumer lenders, including a clutch of consumer-focused peer-to-peer lending platforms. They include short-term consumer lender Fund Ourselves, alternative credit card provider Elfin Market, education finance platform Lendwise, P2P pawnbroker Unbolted, short term lender The Money Platform, and new kid on the block Plend, which has not yet opened to retail investors.

These lenders have a shared mission – to bring affordable and accessible financing solutions to people who truly need them, funded by retail investors.

“There are many parts of the consumer lending market that are underserved and these are segments where P2P can play a part,” says Mike Carter, head of platform lending at Innovate Finance.

“Examples being Lendwise in

education loans, Plend in the near-prime market and The Money Platform's new products in the midprime market. There continues to be opportunity for product innovation which P2P platforms can lead.”

However, while opportunities remain, there is no denying that the P2P consumer lending market has changed considerably over the past

few years. Some of the biggest P2P consumer lenders opted to leave the market completely as they sought to scale up. P2P pioneer Zopa is now a bank, offering personal loans at 22.9 per cent APR. By contrast, when it was a P2P lender, Zopa’s consumer loans were consistently priced in the single digits.

Lending Works and RateSetter

exited the retail market some time ago, with RateSetter’s consumer lending business being acquired by Metro Bank. What was once a multi-billion pound segment of the P2P market, has visibly shrunk.

“Experience has shown that it's not easy to make standard consumer lending work in P2P, so the conditions for it are always

tough,” says Neil Faulkner, chief executive of P2P research and ratings firm 4th Way.

“Platforms focusing on general consumer lending need to find ways to make the interest rates attractive enough for investors through most market conditions, while educating investors to be patient and forgiving during severe downturns, when their returns are lower.”

It would be easy to assume that P2P lenders could swoop in to undercut the banks and gain access to a new generation of consumer borrowers. However, strict regulation and Financial Conduct Authority (FCA) oversight means that rather than ramping up their consumer lending, many P2P platforms are managing their exposure to this segment by choosing only the most creditworthy borrowers, and using technology to weed out any potential risks.

“The FCA has asked lenders to review their affordability

“

I think the P2P space is going to go through something of a renaissance in the next few years”

and lending criteria due to the cost-of-living crisis,” says The Money Platform’s Huntley.

“Like other responsible lenders, we had already undertaken work to ensure that customers were not borrowing for ongoing financial needs leading them getting into a debt cycle, but rather for one-off needs. For our approved customers we are not seeing higher levels of defaults or forbearance required.”

Like other P2P consumer lenders, The Money Platform uses in-house scoring technology to pull together masses of data points which create a clearer picture of what borrowers can actually afford to borrow.

“This allows us to be really precise when calculating affordability and determining creditworthiness,” Huntley says.

“We look beyond the raw credit score used by so many lenders as we know this discriminates against younger customers and migrants who don’t have a history of using credit. So often

credit bureau data is months out of date and doesn’t reflect the customer’s current position. Our systems aim to solve that issue.”

This is a common theme in the modern day P2P consumer lending space. When Plend launched last year, its alternative credit-checking technology was pitched as its main selling point, and helped it to attract millions of pounds in institutional backing.

While banks tend to look at the same set of data points when deciding on a borrower’s creditworthiness, Plend, The Money Platform and other P2P lenders have the technology and flexibility to take a more holistic view. For instance, one of Plend’s key metrics for creditworthiness is evidence of rental payments being made on time, while evidence of unhealthy gambling habits would be flagged as a concern.

“Technology and data are the cornerstones of our strategy, with ongoing improvements to our credit decisioning, incorporating more tools, providing more data which in turn drives better lending decisions and so more financial inclusion and a broader product range,” adds Huntley.

“To this end, we have expanded our tech team considerably since last year, enabling some of the changes outlined and setting us up for the year to come.”

As demand for consumer lending continues to rise, access to this sort of bespoke credit checking technology will make P2P lenders stand out in a crowded field of consumer loan providers. But their challenge will be meeting demand without compromising on their lending principles, or alienating their retail investors.

“As consumer lending

platforms grow, they find it increasingly difficult to maintain attractive interest rates for investors,” explains Faulkner.

“As more investors pile in, they need more borrowers to keep up with demand. The only way to get more of the very best borrowers now is to lower interest rates to compete with the wider lending market.

“As these platforms grow further, they need to add on more borrowers of lower quality to meet investor demand. While they charge these new borrowers higher rates to offset the risks, the overall downward competitive pressures on borrower interest rates mean that, after bad debts, it's harder to offer investors the sorts of returns they want while competing with the banks for borrowers.

“And don't forget they also have the substantial problem at launch of creating largely automated credit policies that rely on probabilities of default, yet they might well be without access to vast amounts of pre-existing data on borrower behaviour, making modelling difficult.”

By focusing on specific niches and constantly reviewing their credit checking technology, the UK’s remaining P2P consumer lenders have the opportunity to carve out a significant market share while also helping to ease the nation’s growing dependence on expensive credit card and overdraft debt.

“I think the P2P space is going to go through something of a renaissance in the next few years,” Huntley predicts.

As long as investors are aware of the risks, and borrowers are thoroughly vetted for suitability, this renaissance could take place sooner rather than later. The demand is there, it’s just a question of supply.

INVESTMENT PLATFORMS

Assetz Exchange is a property investment platform delivering long term stable income for investors, primarily through the purchase and leasing of housing for social good. Regulated by the FCA, it provides the opportunity for investors to create a diversified property portfolio and alternative funding options for the housing sector.

www.assetzexchange.co.uk

T: 03330 119830

E: info@assetzexchange.co.uk

easyMoney is a peer-to-peer property lending platform that is fully authorised by the Financial Conduct Authority #231680. It has £164m+ in investor funds currently deployed and £280m+ in total loans written to date. It has had no borrower defaults and no investor has ever made a loss. Among P2P firms surveyed by Peer2Peer Finance News it has the largest active Innovative Finance ISA portfolio, with over £65m currently invested. easyMoney.com

T: 0203 858 7269

E: contactus@easymoney.com

Folk2Folk is a profitable UK lending and investment platform. More than half a billion pounds has been invested via the platform with no investor losses to date. Loans are a maximum of five years, secured against land/property at a maximum 60 per cent LTV, with a fixed rate of between 7.5 and 9.5 per cent, per annum.

www.folk2folk.com

T: 01566 773296

E: enquiries@folk2folk.com

Invest & Fund is an established alternative finance platform that has deployed over £257m on clients' behalf and has repaid over £158m to lenders with zero per cent bad debts written off. Lenders can achieve a diversified, asset-backed portfolio with gross yields averaging from 6.75 per cent to 7.5 per cent per annum with an option to lend through an ISA or a SIPP for tax-free returns.

www.investandfund.com

T: 01424 717564

E: lending@investandfund.com

JustUs is an innovative peer-to-peer lender that provides a range of consumer and property-backed loans. It has lent out more than £25m and paid more than £1.7m in interest to lenders to date. Investors can enjoy returns of up to 10.98 per cent, with all products eligible to be held in an Innovative Finance ISA for tax-free earnings.

www.justus.co

T: 01625 750034

E: support@justus.co

Kuflink is an award-winning lender and online investment platform. With over £260m invested through the platform, investors can customise their own portfolio investing in specific loans or in a pool of loans diversified across a number of opportunities. Earn up to 9.73 per cent (compounded) per annum, with an IFISA available.

www.kuflink.com

T: 01474 33 44 88

E: hello@kuflink.com

LANDE is a crowdfunding platform that gives investors access to secured agricultural loans. It has created a unique scoring model, accessible infrastructure, and a variety of products so that farmers are able to access financing quickly and easily. With LANDE and its investors as partners, farmers can become more independent and sustainable, while improving their yield, efficiency and profitability. Projects offer interest rates of up to 14 per cent per annum.

https://lande.finance

T: +371 20381802

E: info@lande.finance

Lendwise is the UK’s only peer-to-peer lender that is dedicated to impact investing in education finance. Investors finance education for borrowers at universities and business schools across the UK and globally. Investors define their own risk appetite and use Lendwise’s AutoLend feature to diversify their strategy across a pool of loans, which can be invested in an IFISA wrapper earning average returns of up to nine per cent per annum.

www.lendwise.com

T: 0203 890 7270

E: lenders@lendwise.com

SERVICE PROVIDERS AND INDUSTRY ORGANISATIONS

The European Crowdfunding Network (EuroCrowd) is an independent, professional business network promoting adequate transparency, regulation and governance in digital finance while offering a combined voice in policy discussion and public opinion building. It executes initiatives aimed at innovating, representing, promoting and protecting the European crowdfunding industry. www.eurocrowd.org

E: info@eurocrowd.org

Q2 creates simple, smart, end-to-end lending experiences that make you an indispensable partner on your customers' financial journeys. Its modular platform gives you the ability to manage lending simply throughout the entire loan lifecycle, from application, onboarding, servicing to collections. The result is a better experience for both borrowers and lenders.

https://eu.q2.com

T: 020 3823 2300

E: info@Q2.com