As increasing amounts of institutional finance – or ‘Big Money’– start to roll into the rapidly growing P2P lending sector, some commentators are asking “Does this trend threaten the small guy – ‘the retail investor’ – for whom the peer-to-peer market was first built?”
Firstly, the fact that P2P is attracting the attention of institutions is significant. It means this young and innovative sector is on its way – long past the flash in the pan that some cynics have alluded to in the past. Institutional money flows to where the action is – both in terms of growth and where attractive returns can be found without undue risk.
So the fact that this money is being invested both in the sector itself – via investors in P2P platforms and an increasing number of associated businesses – and through the P2P platforms alongside money invested by individuals, is a very healthy sign for the sector. It is a huge validation of the business models involved, including ours at Landbay. And it means the quest for scale becomes increasingly feasible, with the size of that scale growing ever larger.
As I see it, the potential risks of this trend are twofold. At one level, the smaller investor may risk being forced out, losing access to the best returns because the deeper pockets of fund managers can demand the best deals. On another level, the risk is subtle. Critics are wary that Big Money could distract the innovative thinkers behind P2P platforms from their original desire to democratise finance.
With regards to the first risk, I doubt this is justified as too many players are committed to the retail investor for whom this sector was designed. Peer-to-peer has got to where it is now with the support of the smaller investor – and an awful lot of them. To shun your first supporters at this stage would be both a massive PR own-goal and also very stupid, as it makes no business sense to concentrate those investing through your platform to just a few big players. Should one or more decide to go elsewhere or dictate tougher terms, then the business would suffer. This is one of the reasons why Landbay is aiming to attract 100,000 individual lenders by 2018.
On top of this, one of the key advantages of P2P lending – transparency – means that any platform that gives preferential deals to institutions will be spotted and questioned quickly, not least by the rest of the sector that treasures its reputation as more ethical and committed to the mass market. The competitive downsides and reputational risk for not treating all customers the same, whether big or small, will be more than enough to make this an unwise business move.
At Landbay we are totally committed to treating our lenders the same – whether they are individuals or institutions.
The second risk, that somehow P2P lending will lose its consumer-champion focus and start behaving like the banks of old, is clearly harder to observe and monitor. However, as the basis of competition between the growing number of P2P platforms is so clearly focused on the quality and value of the offer – made very transparent by how the P2P concept works, I think this risk is minimal. If anything, the arrival of Big Money should be a positive pressure to sharpen and increase competition as the sector enjoys increasing interest from institutional investors.
The sector is already so far beyond the virtual monopoly that 4 or 5 big banks used to enjoy. With innovative new entrants arriving month after month, I think the consumer is well-placed to see the continued growth of the quality, variety and value on offer from the P2P sector. We even expect to start taking slices out of markets previously dominated by banks, spreading the positive impact of P2P lending yet further.
Obviously only time will tell. But the pressure is currently pushing in the right, healthy direction as we successful players remain vigilant to ensure nothing threatens the good reputation and high standards that have been set for the sector to date. The strength and quality already in place within the P2P Finance Association provides an additional level of protection.
I think there is little to fear and a lot more to get excited about. Not just the growing interest of institutional money, but also the growing customer awareness that will increase as time goes on. This in itself will allow the P2P lending sector to genuinely take on the banks as equally mainstream providers of better personal finances for the British public, especially now we have increasingly large backers ready to finance this revolution.