What caught my eye this week.
The granddaddy of peer-to-peer (P2P) lending, Zopa, has thrown in the towel on P2P altogether.
According to the company:
…over the last few years, customer trust in P2P investing has been damaged by a small number of businesses whose approach led to material losses for retail investors.
Linked to this, the changing regulation which followed raised the operational costs of running a P2P business, as well as the cost of attracting new investors to the Zopa platform.
To offset these increased costs and ensure we have a sustainable and profitable business, we’d need to reduce investor returns to a point where they’d no longer be attractive and commensurate with the risk that investors take on.
For these reasons, we have decided to fully focus our attention on our Bank.
I think the writing has been on the wall ever since Zopa became a bank in 2020.
If you’re trying to overthrow the established order, you don’t typically pursue all the conventional trappings to make progress.
Zopa had a good run. The bank says that over 16 years – and despite two financial crisis – the average return to its borrowers was 5%. Even through the pandemic it delivered an average of 3.9%.
Given the failures elsewhere in the sector, that’s not to be sniffed at.
I did it my way
Monevator and peer-to-peer lending both arrived around the same time. I was an early adopter on Zopa and so I wrote about things I noticed, such as on a surprising pattern of a particular cohort of my loans going bad.
The zoperati smirked at my concerns on their forum. They said I didn’t understand probability.
But it turned out Zopa did see defaults spike at a higher-than-expected rate in late 2008. My hunch was right.
Zopa subsequently tweaked its processes and that rise in bad loans proved to be a blip. Overall the platform did well in the recession.
I bring up this ancient history because it framed how I viewed P2P. You really could have visibility into how your money was lent with P2P – and the risks and rewards – in a way that was novel for nearly all of us.
But arguably, what the P2P experiment proved is most of us aren’t very good at judging such metrics – even at the level of choosing a viable platform. Many people just chased the highest yields.
Zopa-vision
Originally, peer-to-peer was all about Bob lending directly to Joe.
Bob would read a bio of Joe, look at his photo, and think: “Yeah, Joe looks like a trustworthy sort who needs a new motorbike.”
You’d already have set your interest rate. That would attract a certain cohort of risky/rewarding borrowers, which Joe might fit into.
Even if Joe seemed a bit riskier than you’d prefer, you might still see a tiny sliver of your cash spliced into a loan to Joe – with your money earning a slightly higher rate than other money in that loan – at the cost of your lending going out more slowly.
There were lots of quirks like that, and Zopa hobbyists poured over them.
Many of these early and vocal Zopa investors were more mathematically adept than me. I felt though that some lacked a survival instinct. They understood odds, but perhaps not existential risk.
A few of them had all their investment money with Zopa. I thought that was crazy. I still do, even though history has okayed their decision.
As I’ve said many times, my suggested P2P limits were far more cautious. Perhaps 1-3% of net worth across all one’s chosen P2P platforms. Maybe 5% if you’re keen, rich, or stuck for options.
Widely diversified across each platform, too, of course.
Bang goes the business model
Prudence was wise, because far from gracefully transforming into a bank (not a sentence you’ll read every day) the worst P2P lenders went kaput.
A couple went into administration. Others were consolidated. A few were part of larger businesses that put their underwhelming P2P units into run-off.
Most of these P2P experiments in the UK never achieved any scale. The vast majority you’ll never have heard of.
But there were a couple of high-profile casualties.
The failure of property loan financier Lendy highlighted risks that went beyond borrowers simply not paying you back. Lendy investors found out in late 2019 that their money had not been properly ring-fenced. Thus it could have been used to pay the firm’s creditors.
Elsewhere P2P lender and pawnbroker Collateral was closed down in 2018 when its regulatory status was thrown into doubt. Hard to plan for that.
The Financial Conduct Authority (FCA) tightened up P2P regulations. This (rightly) led to delays in granting Innovative Finance ISA status. But it also exposed another risk. Even a seemingly viable platform could suffer from adverse regulation. This could put a business model in jeopardy at a stroke.
First among less than equals
For all these reasons I graced only two of the biggest platforms, Zopa and Ratesetter, with my money. They were also the only ones I featured on Monevator.
Both seemed to me to have had sufficient scale and profile to be a problem for the authorities if they failed – and thus I hoped got more scrutiny – as well as being more transparent themselves.
Many P2P fans would count a third member of the ‘Big Three’ triumvirate, Funding Circle, as among the safe options. But I was less convinced its business loans were amenable to P2P evaluation, at least in the early days.
True, Funding Circle is stock market listed. That affords extra reassurance, because analysts and fund managers should also be kicking the tyres.
But like all these firms, Funding Circle’s offering changed over time anyway and I didn’t fell like I was missing out.
Eventually there seemed to me no great difference between what it and the other big two platforms offered from a consumer’s perspective – fixed rates, basically – but rates everywhere had plunged, and P2P returns no longer seemed very juicy.
Tails you lose
Perhaps I was too timid. There are other widely-admired P2P sites out there – Assetz Capital and Lending Works for starters – and I am not saying that there’s anything intrinsically wrong with the best of them.
But I also stuck with the big two for practical reasons. At one point it felt like I was being emailed by a new P2P outfit every week. Evaluating them all would have been a full-time job (there are people who do just that). Even as a blog owner let alone as a saver, I didn’t have the spare capacity.
What really concerned me was systemic risk. This might be something off in a platform’s business proposition or with its models, or it could even be fraud. In the worst outcome, you wouldn’t just see 8% of your loans going bad when you’d anticipated that 5% might default. With systemic risk you could potentially lose much more. Maybe everything.
Losing all your money is very unlikely with a High Street bank – even before you consider FSCS protection – or with big stockbrokers. Size, regulation, and reputation aren’t 100% guarantees. But they do help.
In contrast, most of the new P2P firms were loss-making shoestring start-ups. Some were backed by crowdfunding retail investors. One wondered how much experience of actual banking some of the bright founders had beyond using an ATM to withdraw cash on a Friday night.
Risks clearly abounded.
Banking on it
That was (mostly) then. This is now.
With Zopa throwing in the towel on P2P, the original vision of P2P is dead, at least among the big platforms.
Zopa is a bank. Ratesetter was acquired by Metro and has become a loans business. Funding Circle is shut to retail investors for the time being at least.
I suspect this retrenchment has happened because of a combination of risk aversion, market mismatches, regulation, the pandemic – and even success.
The ability of Zopa and Ratesetter for instance to deliver higher returns than cash in a bank without blowing up attracted more money to those platforms. This in itself had a depressive effect on returns. Yet the platforms had to pursue ever-greater scale for their own economic reasons. Regulation costs mounted, and the increasing vogue for insulating investors from the risk of losing any money further curbed returns.
Somewhere the P2P element went by the wayside. In the end you’d save via an aggregated marketplace in almost the same way as you’d put money into a savings account. You expected higher returns but got no FSCS protection. Ultimately you relied on the platform’s safeguards to protect you from loss.
They’d reinvented banking!
Better to be a real bank in that case, I suppose.
Are any readers using the smaller P2P lenders or mourning the loss of the big ones? Let us know in the comments below.
And have a great weekend everyone.
