Record losses hitting marketplace sector

Despite £3.0bn in new gross lending in the first half of 2019 record losses have dragged returns down, the Link Group Marketplace Lending Index has revealed. The value of gross marketplace lending conducted by tech-enabled platforms (which includes crowdfunded or peer-to-peer loans) rose by more than £500m in the first half of the year, up 21.6%. This followed unexpectedly high lending of £1.5bn in Q2 2019, up 24.3% year on year. As things stand marketplace platforms are collectively lending £16m a day. However losses have reduced the net return by 3.4 percentage points – the highest level on our record. This compares to a year ago, when losses reduced returns by 2.1 percentage points. The research attributed this to a weaker economic environment has been a key factor, undermining a growing minority of businesses and consumers’ ability to repay loans. On top of this several lenders increased their exposure to riskier borrowers, which has impacted loss rates. The trend of rising losses continues to be exacerbated by the dwindling usage of contingency funds among platforms, exposing more loans to losses.

Accounting for fees, costs, term length, and losses, the index shows that the net return on a typical loan now stands at 3.8%, the lowest on record.

This has fallen from 5.5% in the second quarter of 2017 and is now significantly lower than its most recent peak of 6.3% in 2016.

Powered by property lending

The sector’s performance in the first half of 2019 was helped by an exceptional period of growth for property lenders – they accounted for three-fifths of the additional lending in the first half of the year.

In spite of the very public collapse of Lendy, and a sluggish housing market, property lending totalled £848m in the first half of the year, up by 54.5%.

LendInvest and Landbay were key drivers of growth. Both more than doubled their lending in the first half of 2019, collectively originating £335m more than over the same period in 2018.

Business lending, which involves companies borrowing to invest, buy new premises, make acquisitions, or refinance, as well as invoice finance, totalled £1.1bn in the first six months of 2019.

This represented a rise of 14.5%, slower than the 17.4% growth seen a year ago.

The index forecasts gross lending will total £6.2bn in 2019, representing annual growth of 16.7%.

Mark Davies, managing director of Link Mortgages Services, said: “Peer-to-peer and marketplace lending has witnessed a tumultuous year so far.

"The sector has been beset by controversy, not least by Lendy’s fall into administration.

"Economic and political uncertainty has provided a more troubling backdrop for consumer and business lending too, and losses have risen.

"In spite of all this, marketplace lending continues to grow as platforms cover the funding gap left by traditional banks.

“More change is coming. Tighter regulation requires clearer disclosure on performance, more robust risk management, and restricts lending to retail investors.

"This will reassure the large-scale institutional investors that are vital to platforms building a more diverse funding base, and it should support long-term, sustainable growth.

“However, as losses rise, and the potential for an economic downturn looms on the horizon, it is clear that marketplace lenders are heading into new territory.

"Should we see the economy slow further, the risk management, loan-servicing and recovery practices they have in place are likely to face significant testing across the board for the first time.”

Rupert Taylor, chief executive of Brismo, which collaborates with Link on the index, added: “Whilst marketplace lenders are working hard to adopt new FCA requirements there is, in parallel, an increasingly widespread acknowledgment that, investors of all types need to be able to compare performance.

“The Link Marketplace lending index demonstrates how performance can be compared and we will continue to develop our methodologies to provide investors with the insights they need to make commitments to the lending asset class.”