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Peer-to-Peer Lending Likely to Continue its March Into the Mainstream

Peer-to-peer lending is one of the most exciting developments of recent modern finance. It is also the chance for finance to become democratised, as investors themselves decide who to lend to, and what a borrower is charged.

Peer-to-peer lending is one of the most exciting developments of recent modern finance. It is also the chance for finance to become democratised, as investors themselves decide who to lend to, and what a borrower is charged.

As the peer-to-peer lending sector (P2P) continues to grow at a rapid pace, it has been interesting to watch the media's reporting on sector. The Financial Times is self-described as one of the leading financial news organisations in the world, and over the last 12 months or so, have been giving increasing coverage of the P2P market.

Earlier in the year the FT ran a positive article titled 'Peer-to-peer lending platforms look to rival traditional banks'. This was followed up by a number of news items, with some general additional coverage of the sector. However, a few weeks ago it ran an article titled 'Why peer-to-peer lending remains inherently unsafe', touting various reasons why investors need to be very careful.

Then only a week later, the Weekend FT had a special report-styled piece on P2P lending. The opening paragraph asking the question "What would a world without banks look like?" and then going on to admit that "converts to peer-to-peer websites ... believe that we're already there - and it's a utopia of 5% returns, affordable loans to trustworthy borrowers and no hard selling of extra products".

Whilst the FT coverage could be accused of appearing slightly schizophrenic, P2P lending has been getting increased coverage - albeit with a degree of (perhaps healthy) scepticism.

There are undoubtedly serious disasters waiting to happen in the P2P lending space. Lending to borrowers on an unsecured basis, and ensuring that defaults remain low, is no easy task. As a lawyer that previous acted for many lenders, and subsequently as a principal in a leading real estate finance business, I know the truth to the old adage that it is 'easy to lend money' - its getting it back that is the hard part.

However, not all P2P lending is unsecured. The P2P lending platform that I co-founded, which is called LendInvest, is a P2P crowdfunding platform for mortgage loans. That is, all of the loans on our P2P platform are entirely secured against property. There are also other variations on secured P2P lending, such as lending to a business secured against its assets, or against unpaid invoices, and so on.

As the P2P lending market grows in size, and moves further into the mainstream, there will be investors that will lose money. However, there are reputable players in the market that have built extremely sophisticated computer systems and algorithms, and are demonstrating a real expertise in 'how to lend', and have sizeable loan books that are experiencing relatively low defaults. Furthermore, for platforms that are lending secured against a real asset, defaults (and more importantly capital losses) should be considerably less.

The Open Data Institute recently released research which was based on data from three of the main P2P lenders in the UK: Zopa, RateSetter and Funding Circle. The ODI research revealed that from late 2010 to Q2 2013, these three lenders had lent a total of £378 million, confirming that the industry has definitely started its march into the mainstream.

In the United States, the P2P lending sector is growing at an exponential pace, and has the largest global P2P lender called Lending Club, which is leading the way. Lending Club, which is only a little over 6 years old, has now lent over $2 billion, and is said to be averaging $2.7 million of new loans a day.

Lending Club has also attracted a seriously heavyweight board of directors, which include some of the biggest names in global finance, such a former Morgan Stanley CEO John Mack and former US Federal Treasury Secretary, Laurence Summers. Names like those don't sign up to be a director of dot com fad, nor a business that is in an industry that isn't likely to succeed.

Then, if there was anyone that doubted the P2P space, in May this year it was announced that Google had bought a minority stake in Lending Club for $125 million - which valued Lending Club at $1.55 billion. There is certainly a recognition in the US, that P2P lending is quite possibly the future of finance.

In the UK, the Bank of England's Head of Financial Stability has questioned why P2P lending can't become the new norm one day, famously being quoted as saying: "The banking middle-men may in time become the surplus links in the chain. It has happened in the liberal arts, music and publishing, and there is no reason it shouldn't in finance. EBay has shown that with transparency, it can be done. Why can't you have an open market for loans? With an information-based web, the disintermediated model of finance becomes a more realistic possibility".

More recently the UK government has also put money directly into the P2P sector, by providing funding through a couple of select platforms. Whether the government will see its money returned safely is one thing, but regardless of this, it confirms that the government is willing to push the sector forward. There have also been recent reports that the high street bank, Santander, is looking at teeing up with a peer-to-peer lender to provide access to the investment asset class for its customers.

As the mainstream banks are struggling with increased capital adequacy requirements, bad legacy loan books, and a shifting regulatory landscape, there is a real need for other forms of lending to fill the gap. P2P lending will likely continue its march into the mainstream, and represents an exciting development for borrowers and investors.

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