The founder of a British peer-to-peer lender believes more platforms will go bust in 2017 as poor risk assessment standards come back to haunt businesses.
Chirag Shah, founder and CEO of Nucleus Commercial Finance, told Business Insider: "The easiest thing in the world right now is getting the money out. The difficult thing is getting it back. Everyone’s done the easy part of building the loan books. Now let's see who can get the money back."
Shah highlighted the collapse of UK platforms Funding Knight and Legion Trade Finance in 2016 and said he expects more closures of peer-to-peer small business lending platforms in 2017, saying "there is no room" for the number of platforms in the market. AltFi, a widely respected data provider for the alternative finance industry, collects data on 26 peer-to-peer lending companies in the UK but the true number of platforms in the space is likely higher. Many of them are relatively small scale.
Shah says: "The majority of them were launched about four to five years ago but the real growth happened in the last two years. So now, starting next year, a lot of those portfolios will start maturing. You can see a lot of other platforms in the real estate space and stuff struggling, changing a lot of things, letting people go. You’re already starting to see the thing come in."
More Collapses
Online property crowdfunding platform Property Partner cut 29% of staff earlier this year and peer-to-peer mortgage lender Landbay's lending volume collapsed by 95% in the third quarter of this year.
Conrad Ford, founder and CEO of Funding Options, told Business Insider he agreed with Shah's view that there would likely be more collapses, saying: "It’s relatively inconceivable that we won’t have some platforms going under." Funding Options is a platform that helps small businesses get the right financing for them by comparing lending options across the industry.
Ford says: "The question is whether all the platforms have sufficient working capital or have what it takes in terms of the loan economics. The straight answer is no. There will be more Funding Knights because this is an industry that supports scale. Just look at how much money some of the big platforms are churning through to survive. They’ve got scale and they’re still not breaking even."
As Business Insider pointed out earlier this year, Britain's two biggest peer-to-peer lenders, Zopa and Funding Circle, have collectively made a loss of over £50 million since 2005 in the course of operating their businesses. Ford says: "Eventually investor confidence and investor cash will dry up."
P2P Platforms
Peer-to-peer platforms allow people or institutions like hedge funds and insurers to invest directly in loans to people or companies by bringing borrowers and lenders together in an online marketplace.
The Financial Conduct Authority, Britain's finance regulator, alluded to concerns about platforms going bust earlier this month. The regulator concluded after a six month review of the sector that one of its biggest concerns was that "the plans some firms have for wind-down in the event of their failure are inadequate."
Shah, a former banker who worked for Merrill Lynch and Wachovia, blames poor credit assessment in much of the market for the problems. He claims he is seeing "a very big red flag" when it comes to underwriting standards, such as companies taking on multiple loans from different platforms.
He said that problems are being made worse by the increased stratification of the market. "The P2P space is forming a hierarchy right now. If you leave the top three or four platforms out, all the other platforms are basically seeing the deals that they are not doing. They are getting third tier or fourth tier deals which have been turned down by banks and turned down by other platforms."
