Whilst the P2P model gained traction rapidly following the financial crisis, it exhibits a number of shortcomings.
Firstly, retail clients and investors are often simply driven by yield, not evaluating the risks sufficiently.
In some cases ‘mom and pop’ type investors are not sophisticated enough to analyse the risks, looking only at the headline rate of interest they believe they will receive.
Several P2P platforms also do not provide sufficient information to their investors for them to make a proper assessment of each individual loan, even should the investor be qualified enough to do so.
This information asymmetry between P2P platform and investor is easy to understand from a GDPR perspective, but it does make the investor very dependent on the assessment that has been made by the platform.
A key concern is that many P2P platforms position themselves as an intermediary, but then, unlike any other type of lender, they do not invest themselves into their own loans.
This can cause a lack of alignment with the retail investors and means that the platform risks comparatively little in relation to the investor.
Arguably it also means that some P2P platforms have less incentive to ensure that each loan is underwritten as diligently as it might otherwise be if the platform or lender had its own money involved.
The loan may also be managed less prudently as a result, this is clearly not the case with every P2P platform, but the failure of Lendy does highlight the shortcomings of this model.
With many P2P platforms competing for the same retail investors, the platforms often pursue the highest yield deals, which tend to be the riskier loans.
Lendy is a good example of this, but naive investors may well be oblivious to the fact that this is why they are promised the higher returns.
Finally, a number of P2P platforms also provide access to institutional investors at preferred terms. The question is, what downside such “preferred nation status” deals could cause for the retail investors.
There are obviously a number of high-quality P2P platforms out there, and the demise of Lendy has somewhat unfairly tarnished the image of this entire sector.
However, it is questionable whether a number of the P2P platforms can get to the necessary scale to operate profitably and to play a meaningful role in the lending landscape.
One could expect many sub-scale P2P platforms to have challenges and we expect further P2P lenders to disappear both this and next year.
