Zopa needed borrowers and Uber drivers wanted cars. It seemed a straightforward match, bringing together drivers with low credit scores who need car finance and a growing band of institutional investors wanting to expand in the so-called marketplace loans sector.
Zopa, the world’s first peer-to-peer lending company, hoped the partnership whereby drivers for the ride-hailing app were directed to its website for loans would mark its entry into a multibillion-pound market for secured loans in the UK.
But barely six months after the deal was struck it collapsed, with the partnership failing to attract as many drivers as expected. “The pilot was interesting, but demonstrated that the potential opportunity was limited for us, and we had other priorities,” Zopa told FTfm.
As it turns out, the deal might not have been such a good idea. This month Uber was told its licence in London would not be renewed after the city’s transport authority ruled it was not a “fit and proper” operator, a move that could potentially deprive around 40,000 private-hire drivers of a big source of income.
Many of these drivers have “vehicle-related debt”, according to James Farrar, an Uber driver who is a co-claimant in an employment tribunal decision against the group. If the ban is not overturned in the courts, some of this debt could default.
Zopa’s experiment with Uber underlines the enormous difficulty faced by marketplace lenders attempting to find new borrowers. These borrowers are crucial for the platforms to grow at a time when there is strong interest from institutional investors to provide crowdfunded loans.
“The market has been developing very quickly,” says Bryan Zhang, co-founder of the Cambridge Centre for Alternative Finance at the university’s Judge Business School. “One watershed moment was when [UK] regulations came in in 2014 — that gave more confidence to institutional investors, so they really see this as a new asset class.
“The problem for the industry in the US and UK is not really on the funding side; it’s attracting borrowers.”
Until April 2014 financial technology companies that focus on online lending and investment were not formally regulated in the UK, but this changed following the introduction of rules from the Financial Conduct Authority, the regulator. With the additional promise of high returns at a time of low interest rates, the overall market grew to £3.9bn last year, compared with £94.4m in 2011, according to AltFi Data.
According to Mr Zhang, institutional investors such as hedge funds, asset managers, pension funds and family offices now account for between 30 and 40 per cent of peer-to-peer consumer and business lending, compared with less than 5 per cent before 2014. BlackRock, the world’s largest asset manager, made its first significant retail investment in peer-to-peer loans last year when it bought a stake in Funding Circle’s investment trust.
“It’s clearly such a young sector but the institutional interest has grown rapidly over the past few years,” says Tom Bull, a director at EY, the consultancy. “The platforms have seen the benefits of bringing on investors that have large pots of capital to deploy. That brings scale, it helps them grow more quickly [and] it helps them unlock lending relationships.”
So far, however, they have struggled to attract borrowers to match this demand. Competition is increasing from traditional banks — Goldman Sachs has its own online lending platform — especially for prime and super-prime debt that is less likely to default.
Zopa stopped taking new client money in December and has a waiting list of at least 15,000 investors. It has said it is aiming to reopen to new money by the end of the year.
Hargreaves Lansdown, which sells funds to UK retail investors, shelved plans to launch a peer-to-peer service, because “market size remains relatively small compared with the other exciting opportunities we have in front of us”.
Data are patchy, but surveys of borrowers show that customers remain wary of alternative lending groups. Just 7 per cent of 1,100 people said they had used this sort of service to borrow in 2017, according to a survey by EY. Separate research from Blumberg, a venture capital group, reported only 4 per cent of 1,050 British adults had used alternative lending services in the past 12 months.
The platforms hope that growing interest from institutional investors will reassure borrowers by lending authority to their brands.
They have also sought partnerships such as Zopa’s with Uber to help attract new borrowers.
Zopa has deals with Metro Bank, the UK retail bank, and Unshackled, a phonemaker, so that the companies’ customers are directed to its website for loans. Giffgaff, the mobile network owned by Telefónica, the telecoms company, sends its customers to RateSetter, one of the UK’s largest peer-to-peer lending websites. Santander, the Spanish bank, refers small businesses to Funding Circle.
“It’s the nature of the way the market has gone. The banks have had to retrench because of capital rules and these institutions are being set up to plug the hole where banks can’t lend,” says James Cuby, London-based managing director at Waterfall Asset Management, the hedge fund.
However, Mr Cuby adds that institutional investors will remain wary until marketplace lenders experience a full downturn and prove their competence in assessing credit risk. “The real question is not so much origination, but can these marketplace lenders service these loans?” Lendable, the UK marketplace lending website, said Waterfall would invest £100m through its platform this year.
“It hasn’t really been tested yet. What happens when things go wrong? That’s a really important thing that we worry about.”
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