LET’S GET PHYSICAL
Lenders defend use of business premises as collateral POWER TO THE PEOPLE
What role will retail investors play in the future of P2P?
Folk2Folk’s Giles Cross on social impact and the rural economy>> 12
ISSUE 18 | MARCH 2018
New ringfencing rules will create ‘two-tier’ protection for P2P cash NEW ringfencing regulations in the banking sector look set to create a twotier system of protection for peer-to-peer investors’ money before it is lent out. P2P platforms can handle lender funds either by setting up separate client money accounts with a traditional bank or by outsourcing it to an e-money provider. Government banking reforms, introduced in response to the financial crisis in 2008, mean that UK banks must separate their investment and retail banking activities by January 2019. This means that money held in the retail bank is protected from the investment bank’s operations. Technically, this means P2P funds held in a client money account with a bank are protected by the Financial Services Compensation Scheme (FSCS) until the money is invested but the same does not apply to P2P
investor funds held by an e-money provider. Furthermore, e-money providers can be based anywhere in the world, meaning that they may comply to a different regulatory framework entirely. Neil Faulkner, managing director of P2P analysis firm 4th Way, said the distinction between platforms using client money or e-money accounts was a “long-tail risk” but one investors needed to understand.
“It is a small risk compared to others when choosing a platform, but they all add up,” he said. “Provided you are spreading across lots of platforms there is no reason to worry why some are in e-wallets and some are ringfenced.” Alison Donnelly, head of advisory at financial compliance firm FSCom, said the changes do upgrade the protection on offer where banks hold the client accounts, but said that doesn’t necessarily make e-money riskier.
“If you have a choice of credit institution or e-money, a credit institution has higher capital requirements and FSCS cover so in that sense it is more than likely always going to be safer on that whole ‘too big to fail’ point,” Donnelly said. “That said, there is no e-money institution that has gone out of business and most will safeguard funds with a European Economic Area-regulated bank.” Barclays has already been in contact with P2P lenders about the impact of ringfencing rules on their client accounts. P2P bridging and buy-to-let mortgages provider JustUs has been told by Barclays that their client accounts will be in the retail part of the ringfenced bank. Lee Birkett, founder of JustUs, told Peer2Peer Finance News he thought accounts held by ringfenced banks were safer for P2P investors. >> 4
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arch is gearing up to be an exciting month for the UK’s peer-to-peer lending industry. Finovate Europe, Innovate Finance’s Global Summit and ReWork’s Deep Learning in Finance Summit all take place in London in the coming weeks providing opportunities for fintech professionals – including the P2P community – to network, learn and grow their brand’s presence. Peer2Peer Finance News is a media partner of Finovate and ReWork, so make sure to check our website for discounts if you’re yet to buy tickets. It’s also an exciting month for P2P investors, as ISA season gets into full swing. As our special feature on retail investors shows, this group is the lifeblood of the P2P sector and the Innovative Finance ISA looks set to solidify their place in P2P’s future. As usual, we’ll be continuing our up-to-the-minute coverage of the tax wrapper as we head towards the end of the financial year, so make sure you look out for our comprehensive guides, news stories and in-depth analyses in both print and online. Happy reading!
SUZIE NEUWIRTH EDITOR-IN-CHIEF
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“Ringfencing reduces the possibility that essential banking services used by ordinary depositors are put at risk by a failure in another part of the business or the global financial system,” he said. However, other P2P platforms who use e-money providers insist investors should not be concerned. Business lender Growth Street uses e-money provider PrePay solutions, owned by Edenred and Mastercard. Greg Carter, founder of Growth Street, believes that using an e-money provider is beneficial as activity is
more automated compared with the way banks manage client cash accounts, so transactions can be completed faster. “When we chose the e-money route we did lots of due diligence,” Carter said. Some of the e-money providers they eschewed were very young and regulated overseas, he added. While e-money providers do not offer FSCS protection or comply with ringfencing regulations, Carter points out that those in the EU still operate under the Payment Services Directive so similarly have to safeguard funds from their own balance sheets.
“The whole retail banking system will be less exposed to investment banking which is good for everyone whether on a client or e-money basis,” Carter said. “It is to the benefit of all consumers; the differences between client money and e-money won’t change.” It comes as HMRC is facing calls to clarify the rules regarding e-money accounts and ISA manager status. Current ISA rules say funds have to be held with a deposit-taking institution. Many e-money providers do not have these permissions, yet it is believed some Innovative
Finance ISA providers are still using them. Jake Wombwell-Povey, chief executive of P2P administrator Goji, said this was a “hangover” from the old ISA regime and that HMRC had not considered how P2P platforms operated before setting up the rules. “The rules have no detriment to anyone in using the e-money institution,” he said. “It would not be a good outcome for HMRC to be draconian on this. It is more that HMRC will say it needs sorting. “There is no detriment or tax avoidance or impact on competition.”
P2P platforms race to meet demand for green bonds PEER-TO-PEER lenders have launched a slew of new renewable energy bonds and loans, as demand for ethical investments continues to rise. P2P investment manager Goji recently teamed up with alternative investment firm Prestige-Prime Group to launch its first ISAready renewable energy bond, and ethical lender Triodos Bank unveiled its own P2P platform – Triodos Crowdfunding – which offers investments in renewable and social opportunities. These products join a range of Environmental, Social and Governance (ESG) investment opportunities which are already being
offered by platforms such as Abundance and Assetz Capital. Demand from investors is believed to be behind the popularity of ethical P2P options. Last month, a report from finance house IW Capital found that 36 per cent of UK
investors said the social impact of their investments was at least as important as their returns. “There’s an increased focus on ESG investing across the investment space,” Jake WombwellPovey, chief executive of Goji, told Peer2Peer Finance
News. “That’s a big macro trend at the moment, and it fits perfectly with the ethos of P2P lending. “Investors and advisers are already very used to investing in these sectors through programmes like the Enterprise Investment Scheme (EIS) and Business Property Relief. The challenge comes when they can’t invest in renewables via an EIS wrapper any more. We launched our renewable bond to give investors the same sort of deal with the same types of investment opportunities. “The IFISA could be the new tax-free wrapper of choice for EIS investors who want to access ethical and green investments.”
Using business premises as loan collateral ‘sensible and necessary’ PEER-TO-PEER lenders have defended the use of commercial property as loan collateral, following a warning by the Bank of England about the potential risks it creates for small- and medium-sized enterprises (SMEs). The central bank said last month that SMEs who use their own business premises as collateral could be hit in the event of a market adjustment. It has previously warned that commercial
property prices in the UK are stretched and are vulnerable to re-pricing. However, Stuart Law, chief executive of P2P business lender Assetz Capital, said it is “eminently sensible and indeed often necessary” for SMEs to secure a loan against their business premises. “Without security it can be difficult, more expensive or impossible for a business to raise the finance it requires,” he said. He claimed security
brings SMEs more and lower-cost finance, which could help with working capital requirements and therefore make businesses more stable in an economic downturn. Law added that SMEs who mortgage their own trading premises are unlikely to get loans valuing their property at elevated investment levels. “Instead, a vacant possession value is more likely to be used and that will be much less affected
in a recession,” he said. Mat Gazeley, spokes person for Folk2Folk, which lends to local and rural businesses, said securing loans against property helps to mitigate risks for platforms, which is comforting for individual lenders. He added that Folk2Folk has a very strict policy when assessing which businesses it lends to, and applies a maximum loan to value (LTV) of 60 per cent on properties being used as security.
Volatility in stock markets bolsters case for P2P THE RECENT turmoil in global stock markets could result in more investors flocking to peer-to-peer lending. Fears of more US rate hikes due to inflationary pressures have triggered widespread volatility, hitting retail investors’ returns from stocks and shares. Sam Handfield-Jones, head of P2P lender Octopus Choice, said this is currently the biggest reason for customers choosing its platform over the stock market. “People could put their money in cash, but in a low-interest environment they would be losing returns,” he said. “P2P lending, which sits in between cash and stocks, is appealing.”
The stock market is volatile because prices can be affected by a huge range of factors, such as investor perception, inflation and political instability. Supporters of the P2P industry argue that the sector is more stable than the stock market, as a P2P loan is a fixed-term investment which is based on the rate a platform can lend on. The capital value is returned to the investor at maturity. “P2P lending has low volatility because returns are smoothed, based on a fixed monthly
return of, say, 0.5 per cent or even one per cent,” said Paul Riddell, head of marketing and communications at P2P property platform Lendy. “We provide loans from seven to 12 per cent per annum, and we offer bonuses for holding to the end of an extended term. It’s easier to plan with that certainty of income.” As a fixed-term loan, P2P lending should, in theory, be uncorrelated to equity or bond markets. However, Danny Cox, head of communications at fund supermarket
Hargreaves Lansdown, argued P2P lending is a fairly small sector which has not been around for a “normal” economic cycle of high inflation and interest rates. “We can’t fully be sure what correlations exist or don’t exist,” he cautioned. Stuart Law, chief executive of P2P lender Assetz Capital, claimed that an investor who fully diversified across a range of loans would have seen an absolute return in almost every market environment. “The stress tests carried out by lenders show P2P can still produce a return above inflation in the worst years,” he said. “There is every reason to think it is more stable than the stock market.”
P2P securitisation boom still on the cards
PREDICTIONS of a securitisation boom in the peer-to-peer lending sector last year failed to materialise, but analysts are still optimistic about the market. The industry first dipped its toe into the debt-packaging trend in 2016 when Funding Circle became the first UK P2P platform to securitise its business loans, followed by Zopa with its consumer portfolio later in the year. Both platforms said they planned to do more securitisations in the near future. Ratings agencies such as Moody’s predicted a boom in P2P securitisations, but the only activity in 2017 was a £208.9m Zopa deal led by investment trust P2P Global Investments. Anthony Parry, senior
vice president and manager at Moody’s, says that there has not been a slowdown, but rather there are now more funding sources for P2P platforms. “The deals have gone well and performance wise they have been in line or better than expectations,” he said. “It is a sign that the lenders have diversified their funding sources. Securitisation is one of a number of different sources. Clearly there is significant institutional investment directly rather than through securitisation.” Parry said there will always be institutional investors who prefer securitisation over direct investment but he said platforms need
to be of a significant scale to make it work. “It makes perfect sense for the lending platforms to diversify their funding sources in order to have a long-term stable funding strategy,” he said. “There is a critical volume that needs to be reached to make it a sensible funding choice. “If you look historically the smallest consumer loans deal has been around the £100m mark, you won’t see anything below that level. “Broadly speaking if volumes exceed £1bn then securitisation probably becomes an option. “I would expect more securitisations this year.” Ratings agency S&P Global is also expecting more activity and has predicted a 30 per cent
increase in securitisations from marketplace lenders around the world during 2018. Jonathan Kramer, head of capital markets at Zopa, said: “We are pleased with the reception that Zopa loans have had in the asset-backed securities (ABS) market and believe it reflects confidence both in our underwriting and credit management as well as how we have scaled our business over the last 13 years. Our aim is that the Zopa asset is familiar to the ABS community and expect there to be further issuances in the future, which is aligned with our diversified funding strategy.” Funding Circle did not respond to requests for comment.
Folk2Folk’s Cross: Subsidies haven’t worked for UK farmers
SUBSIDIES are not the answer for the UK agricultural industry, Folk2Folk’s chief executive has said. UK farmers currently receive £3bn a year from the EU, which is set to be withdrawn after Brexit. “Six out of seven farms in the UK don’t make a profit – and that’s with the subsidies,” said Giles Cross, who heads up the rural business lender. “The answer for UK
farming is diversification, irrespective. So let’s work together to enable that, and to make [the issue of subsidies] irrelevant.”
EU support for the country’s farmers will be withdrawn after Brexit, but environment secretary Michael
Gove said that the UK government will guarantee subsidies at the current EU level until the 2022 election. There will then be a “transitional period” in England. Folk2Folk is looking to build a “national local lending network”, whereby local people lend to local businesses, boosting the agricultural and rural economy. Read the full interview with Cross on page 12.
Earliest IFISA providers forecast another bumper year for inflows TWO OF the previous tax year’s biggest Innovative Finance ISA (IFISA) providers are predicting another bumper crop this year despite increased competition. Renewables P2P platform Abundance, which secured £10.5m of IFISA subscriptions in the 2016/17 tax year, says it has now reached more than £21m in total across 2,290 accounts. “Abundance has recently launched more than £10m of new projects eligible for inclusion in its ISA this tax year,” Bruce Davis, co-founder of Abundance, said. “These projects are selling fast as ISA
season picks up. More projects will be launched in the near future.” This positivity was echoed by Crowdstacker. The secured business lender attracted £1m a month on average in its IFISA accounts during the 2016/17 tax year and £15.6m across 1,548 IFISA accounts in total. The platform says that trend has continued. “From what we see, investors are still very keen on the IFISA,” Karteek Patel, chief executive of Crowdstacker, said. “We are currently tracking what we took within the wrapper in the 2016/17 tax year. Given
typical investor behaviour in the run-up to the end of March we anticipate the next few weeks will be our busiest, providing the strong possibility of taking more in the ISA this year than last.” Overall, HMRC says 2,000 IFISA accounts were opened in the 2016/17 tax year attracting £17m in subscriptions, a tiny intake compared with 8 million cash ISAs and 2.5 million stocks and shares ISAs opened in the same year, valued at £39bn and £22bn respectively. But some of the bigger brands such as Zopa, Funding Circle and RateSetter were missing
from the 2016/17 tax year as they had not yet received the requisite regulatory permissions to launch their own IFISAs. The ‘big three’ have since launched their products, alongside other well-known names such as Assetz Capital. They have all reported a boom in sign-ups from interested investors.
Fintech recruitment defies Brexit blues
DEMAND for fintech jobs is continuing to rise despite Brexit uncertainty, a specialist recruiter has said. Jamie Cole, chief executive at Londonbased recruitment firm EC1 Partners, said the agency has continued to see strong growth in the sector. “Across the board we have seen an increase in advertised roles as the industry continues to grow and become more
robust,” he told Peer2Peer Finance News. As well as a rise in job adverts, the agency has witnessed a significant increase in the number of applicants. Cole said demand for fintech jobs has been increasing over the last few years and even more so recently. “A lot of professionals from traditional financial services markets are looking to make the shift into fintech,” Cole said. “We have conversations
weekly with talented indi viduals wanting to work in the fintech market.” He added that the payments and blockchain/ cryptocurrencies sectors are seeing particularly strong activity. There have been some concerns that Brexit could result in London losing its status as Europe’s fintech hub. The latest CBI/PwC Financial Services Survey suggested attracting and retaining entrepreneurial talent is
crucial to ensuring the UK remains a vibrant fintech centre after Brexit. Cole said his firm has not seen any evidence of a drop in fintech talent from foreign nationals since the EU referendum vote. Furthermore, he said the vote has not resulted in employers being more cautious about expanding, adding: “From our view employers are focusing on growth irrespective of Brexit.”
The perfect fit
Raja Daswani, head of Hong Kong-based bespoke tailor Raja Fashions, explains why women’s suits are more popular than ever – and why every woman should have a ‘four-piece’ of her own
ESPOKE SUITS were once synonymous with male professionals, but not anymore. Thanks to high-profile trouser suit fans such as Hillary Clinton, Lady Gaga and Cara Delevingne, fine tailoring is rapidly becoming the domain of fashionable (and powerful) women everywhere. At New York Fashion Week, Calvin Klein and Phillip Lim sent models down the runway in beautifully cut trouser suits worn with simple heels and minimal makeup, ensuring that all eyes were on the tailoring of the blazer and trousers, and the confidence they imbue.
“Ladies’ suits are not as easy as men’s suits,” says Raja Daswani, head of Hong Kong-based bespoke tailor Raja Fashions. Yet after years of dealing with a mostly male client base, Raja Fashions is now producing more ladies’ suits than ever before. “This is a trend that has been ongoing for a few years,” says Daswani. “Ladies – particularly those working in the fintech sector – have become more powerful, and they want to wear good suits that reflect their position in the workplace.” However, as Daswani points out, there is no ‘one size fits all’ template that works for women’s suits. Measurements change, and fashions evolve – and this is why there is no substitute for a bespoke tailored design. A well-made suit will outlast any fashion craze, and it can be altered and updated over the years so that it always feels like the perfect fit. And best of all, you can be certain that each design and silhouette is completely unique to you. According to Daswani, the fourpiece suit is becoming increasingly popular among professional women: this includes a blazer, a skirt, a pair of trousers and a dress, all of which can be mixed and matched to create three separate outfits. And by getting each of these pieces created at once, there are huge savings to be made – after all, you are essentially buying three outfits for the price of one. When it comes to fabrics and colours, Daswani always recommends that women opt
for wool-based fabrics for winter suits, and natural fabrics such as cotton and linen for the warmer months. He also advises that fintech professionals start out with a conservative colour when choosing their first tailored suit. “It all depends on the individual,” he says. “We have had ladies who like brighter colours, but then again, in the financial world they try to be a little more conservative, so you have a lot of blues, blacks and greys.” These traditional colours can then be updated and personalised with a floral blouse, patterned tights, bold jewellery or statement heels. “If you wear a darker coloured suit, we usually suggest that you pair it with a brighter coloured blouse,” he adds. “A lot of different things are possible.” Raja Fashions offers tailored garments at highly competitive prices. Bespoke suits start at £350 for lightweight fabrics and £435 for 100 per cent wool. Raja Fashions’ premium suits go up to £2,500, but the same garment could cost £12,000 on Savile Row. Tailors from Raja Fashions are in the UK every six weeks to perform fittings across London, Scotland, Wales and Ireland. For more information, visit Raja Fashions’ website at www.raja-fashions.com or email email@example.com to book an appointment. Hong Kong main shop: 34-C Cameron Road, G/F, TST, Kln, Hong Kong.
Capital at Risk.
Phil Reynolds, managing director of Newable Lending, explains how investors can Brexit-proof their portfolios by lending to SMEs
T’S THE question on every investor’s lips: How do you Brexit-proof your portfolio? And Newable Lending – the recentlylaunched business lending platform – believes that it has the answer. The peer-to-peer lender is matching up sophisticated retail investors with growthfocused small- and medium-sized enterprises (SMEs) across the UK as part of a wider plan to support the British economy. “For many investors, it’s about Brexit-proofing their portfolio,” says Phil Reynolds, managing director of Newable Lending. “The businesses that they are currently investing in whether they are equity or debt – how are they going to grow post-Brexit, and do investors think that they have access to ongoing funding? “We are about more than loan financing, we are supporting the economy by supporting UK SMEs.” Reynolds predicts that the British manufacturing sector is particularly well placed to take advantage of the country’s currently
booming export market, although the platform also focuses on SME borrowers within high-growth sectors such as medtech, life sciences and spacetech. By investing in these SMEs, Reynolds believes that interest-starved investors can make great returns (estimated at between seven and 10 per cent*), while also supporting British businesses amid a period of economic volatility. And Newable Lending is not taking any chances when it comes to the businesses’ performance – each borrower is offered 12 hours of free mentorship in the first year of the loan, and every one of the SMEs listed on the platform can take advantage of its extensive network of business experts. “Having operated as a responsible finance provider for many years, we have a history in ensuring our loan products are there to enable businesses to grow
and reach their potential without being hamstrung by obscure, opaque contracts,” adds Reynolds. However, not every business will make it into the Newable Lending pipeline. Only around 10 per cent of loan applications are eventually approved, as each prospective borrower is expected to meet with the highest standards before it can be listed on the site. Businesses must be able to provide security in the form of non-residential property or high-value goods, and they must have strong fundamentals and a commitment to future growth. Transparency is also key – as Reynolds says: “For us, it’s all about supporting the businesses, and allowing our investors to be a part of their growth stories.” Although Newable Lending targets returns of between seven and 10 per cent* for its investors, Reynolds firmly believes that business lending
We are about more than loan “financing, we are supporting the economy”
should be about more than simply returns. “The investors that we attract like the idea that we can offer them a decent return, but we actually offer more than that,” he says. “We are offering investors the opportunity to earn a return while funding UK SMEs, and be comfortable that they’re investing through a platform whose mission is to enable UK SMEs to flourish.” Inflation-busting interest rates, transparency and a chance to help British businesses thrive – we believe Newable Lending may have cracked the formula for Brexitproof investing.
Your capital is at risk if you invest. Investments are illiquid (meaning the inability to sell assets quickly or without substantial loss in value). Newable Lending for Growth Limited is not covered by the Financial Services Compensation Scheme (FSCS). *Projected return is an estimate of what investors could earn after fees but before bad debt and taxes. Newable Lending for Growth Limited is an Appointed Representative of Resolution Compliance Limited. Resolution Compliance Limited is authorised and regulated by the Financial Conduct Authority (FRN 574048).
The good life
Folk2Folk chief executive Giles Cross is on a mission to boost rural economies through peer-topeer lending. He speaks to Andrew Saunders about Folkonomics, the crime of faceless money and what a good day’s work means to him…
ARELY A month into his new role as chief executive of Folk2Folk when we meet, Giles Cross is buzzing with ideas about where he wants to take the Cornwall-based local business lender, and why its rural focus makes it stand out in a crowded market. “Investors are attracted to us by the interest rate we offer – 6.5 per cent,” he says enthusiastically. “But they are lending to local businesses – to food producers, retailers, restaurants and hotels. “Businesses that they can see, visit, buy from and stay in. It gives them a good feeling, that they are stakeholders in the local economy. It’s why we have such incredible rates of return business. “Yes, we are in the business finance space, but if that’s all we talked about I think it would be a real shame.” What Cross likes to
talk about instead is the importance of local lending in building strong local communities, which Folk2Folk has distilled into its very own micro-economic version of trickledown theory, catchily christened Folkonomics.
retaining local transport routes and tackling issues of rural deprivation and homelessness.” And the real beauty of the Folk2Folk approach, he adds, is that the good stuff happens not via complex and expensive interventions mediated
The large central financial “ institutions no longer facilitate the free movement of capital” “We’ve trademarked it, it’s ours,” he says proudly. “Folkonomics is about creating socially and economically successful rural economies. It’s about creating jobs and retaining talent. It’s about more affordable housing, keeping schools open by keeping the numbers of pupils up, it’s about
by the blunt instrument of government, but as a consequence of the simple business of matching investors who want to lend with businesses who want to borrow. “Our model is about rich people who require interest on their money beyond what the bank
or building society can provide, lending to asset-rich businesses which require funds for growth,” he explains. So local people help other local people, and money is put to work creating jobs and spending power right on investors’ doorsteps. That’s the theory. Of course it is no secret that trickledown – the idea that as the very wealthy get even richer, money leaks out of their coffers and trickles down through the social stratas to the benefit of all – has been widely criticised since it was popularised by the Reagan administration in 1980s America. But its failings, says Cross, are those of our financial institutions rather than a flaw in the principle itself. “If it doesn’t work as advertised, it’s because since 2007/2008 the large central financial
institutions no longer facilitate the free movement of capital in the way that they used to,” he asserts. “At a micro-economic level, we know that it works. It creates a throughflow in the economy that benefits everyone.” As Folk2Folk is “just about to trip over £200m” in loans there are clearly quite a few lenders and borrowers who have been persuaded to give its brand of localism a try. And the word is spreading – Folk2Folk now has 10 local branches across other
parts of the UK including East Anglia, Cheshire, Cumbria and Yorkshire. It has also been hiring, with two significant new posts – chapter development manager Claire Thayers and head of farm and rural engagement Ian Bell – both aimed at raising Folk2Folk’s profile and promoting its local lending ideals. “We are building a national local lending network,” says Cross. “I want to be in the agricultural and rural economy, that’s where we started and where our roots are.” Although Folk2Folk
itself is only five years old, those roots really do go back a long way, thanks to its connection with solicitor Parnall’s, also based in Launceston. Folk2Folk co-founder Mark Parnall is managing director of the family legal firm, whose predecessors began arranging secured loans in the form of private mortgages as long ago as 1647. As well as being an eye-catching USP, that heritage was actually a spur to getting involved in P2P, says Cross. “Our financial model predates banks and building
societies. You only have to watch Poldark to see how Ross [Poldark, the TV show’s eponymous hero] funds his mines through solicitors and local investors.” What’s new is not the concept so much as the technology platform that is used to deliver it, enabling Folk2Folk to get to more potential investors and borrowers than any 18th Century entrepreneur could have dreamed of. “This is modern lending, done the way it used to be,” says Cross. The blend of old and new extends to a very
out of seven farms in the UK don’t make a “Sixprofit – and that’s with the subsidies”
cautious attitude to risk. Loans are all secured and only at a conservative maximum of 60 per cent loan-to-value. Cross admits that the one metric he is really keen to maintain is, “our record of zero customer losses for lenders. Only a foolish man would assume that we will, but we will certainly fight for it.” Despite the received wisdom in banking that if you are not taking any losses, you are not maximising your returns overall? “One of the great crimes of the financial services industry has been that it only deals in faceless money,” states Cross. “You forget that the money actually belongs to someone. “So if you question your value on your own profitability rather than on your losses of other people’s money, that smacks to me of traditional finance not alternative finance.” Folk2Folk has lent to a wide range of businesses from property developers to specialist engineering firms, and has also helped several individuals buy their own pubs. But farmers are still the mainstay of the rural economy in many parts of the country, and a big part of Folk2Folk’s business. How will they fare post-Brexit, especially if and when the EU subsidies on which
many rely start to dry up? Regardless of the Brexit outcome, if the aim is to build a prosperous and sustainable agricultural economy, subsidies haven’t worked, he says. “Six out of seven farms in the UK don’t make a profit – and that’s with the subsidies,” asserts Cross. “The answer for UK farming is diversification, irrespective. So let’s work together to enable that, and to make [the issue of subsidies] irrelevant.”
our platform. But it will never take primacy.” Cross says that the priority for Folk2Folk is finding investors who share the company’s ethics. “If someone came along and said ‘Here’s £300m’ – well I could never place that. But if someone said ‘We’d like to invest so much a month in these kinds of loans, and please treat us exactly the same way as any other investor’ we would certainly entertain that. In fact
with Folk2Folk, “I IfeltfellI inhadlovefound my place” But doesn’t all this talk about the countryside put off less muddy-booted investors? Apparently not. “Over the past 19 months we’ve seen that our lenders are becoming increasingly urban, but with an ‘escape to the country’ mentality,” Cross explains. “The business is also looking for institutional funding to boost its lending power and smooth out the peaks and troughs in supply and demand. “We will attract a certain level and style of institutional money on
we’d do so with glee.” It’s been a busy few months for Cross who started last summer as chief marketing officer but then found himself in the running for the top job after then-chief executive Jane Dumeresque left unexpectedly. “When my predecessor chose to resign it was for reasons as reported – a conflict over the rate of growth,” he says. “Too quickly, too much.” The temptation to throw his hat into the ring proved too great
to resist. “I fell in love with Folk2Folk, I felt I had found my place. I didn’t want anyone else to take the opportunity.” His big challenges, he says, include many that would be familiar to anyone running a small business. “Any small firm that says business origination is not a challenge is probably fibbing,” he comments. “Cashflow is always interesting. And at what point do we seek further investment?” He’s also been thinking about the structure of the business that he has inherited, including those branch offices, which makes Folk2Folk one of the very few P2P lenders where customers can literally walk in off the street. But in a sector known for using technology to keep costs down, aren’t those office locations an expensive luxury? Perhaps they are. Cross is certainly sold on the value of face time with customers – but there may be more than one way of delivering that interaction. One of his big ideas is to put Folk2Folk branches on the road, visiting remote rural villages and towns in the same way that mobile libraries, shops and even banks used to, back in the day. “What if we were to change our focus
to mobile branches?” ponders Cross. “I am committed to a branch network, but I don’t know what that looks like.” So keep your eyes peeled, the Folk2Folk mobile lending van might be coming to a village square near you soon. Folk2Folk’s Innovative Finance ISA (IFISA) has had a good response so far and is now open for transfers in from other ISAs. “The appetite for transfer in is very high,” says Cross. “Were never going to take out the big ISA providers, that’s not what it’s about. But we anticipate that in the first quarter we will do quite a few million in new funds via transfer in – as quite a niche player that is significant for us.”
He would also like to make Folk2Folk available to smaller investors – there is currently a £20,000 minimum investment threshold. “I would like to further democratise our position and reduce that threshold in time, but we must do it properly,” he affirms. “We are not for people who want a punt.” And there is a new website in the offing, part of an integrated online and offline profileraising drive to drum up more customers. The site promises to be something a little out of the ordinary, says Cross. “What delights me about it is that every care has been applied to make sure that it uses the keenest, newest and
most customer-focused technology,” he explains. “But in our slightly rural way, it looks like no other website I’ve ever seen.” What about his longerterm goals, both for Folk2Folk and for P2P in general? He isn’t keen on the growth target he inherited, “This notion that by 2020 we should have £1bn in cumulative lending. It doesn’t make sense – we could do that and only have £10,000 in live lending on the books”, but won’t be drawn on any new ones just yet. But if the destination is yet to be revealed, he knows how he wants to get there. “I want to build a best-loved brand in financial services,” he states. “I have no desire
to be enormous but I do want to have real social, financial and emotional value and be the goto financial provider for the local and rural community. That would be a good day’s work.” As far as the wider alternative lending market goes, the challenge as he sees it is to keep growing without losing sight of its original aim – to be something that banks were not. “I hope that alternative finance remains alternative, that it doesn’t morph into traditional finance,” he says. “I hope that those of us who were attracted to it because of its purity and ability to deliver positive outcomes don’t get hoodwinked into being just like everyone else.”
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Keeping the ‘peer’ in peer-to-peer lending Richard Luxmore, director at property-backed peer-to-peer lender FundingSecure, explains why the retail investor is at the heart of their offering
HE ENTIRE concept of peer-topeer lending is about individuals borrowing from their peers, being someone’s equal in terms of rank and age. There is a very real danger that P2P lending is being over taken by institutions and platforms are starting to resemble banks. At FundingSecure the retail investor is at the heart of our platform. We currently have over 3,000 investors, more than 95 per cent of whom are individuals – aka retail investors. With an average investment of £31,000 these range from as small a holding as £25 to our largest investors with in excess of £1m each, all of whom are retail investors! Our minimum investment is £25 to ensure we are truly open to all individuals. A number of platforms have raised their minimum levels and we can understand why; the smaller investor takes broadly the same amount of processing as a large investor, sending deposits,
requesting withdrawals and asking questions on our live chat service. Some platforms have argued that the smaller investor does not understand the risks involved and have thus denied them the opportunity. To us, this goes against the spirit of P2P lending. On our website we say “Our aim
North – driven by an overriding belief that property prices in the South will forever rise and property prices in the North will forever stagnate. The widespread geography of our investors helps as a little local knowledge about a property can be very useful. Our investors have, to a degree, become our eyes and ears.
are truly open to all “We individuals ” is to allow investors the opportunity to participate in the above-average returns associated with alternative finance”. It would be a shame to deny so many the opportunity, limiting it to so few. Although our investor base is national, our borrower base tends to overweight to the North of England, particularly Greater Manchester and Merseyside. We suspect this is due to a lack of funding generally in the
It would be incomplete to write an article on retail investors without mentioning the Innovative Finance ISA (IFISA). We launched the IFISA in April 2017, soon after receiving full regulatory permission. The response has been overwhelming with around a third of our investors having opened an IFISA account. Most of the transfers in have been from cash ISAs where the opportunity to earn 12 per cent tax free versus
one to two per cent on a typical cash ISA provides such a compelling case. Our predicted rates are currently 13.4 per cent gross and 11.2 per cent net (net of default losses). In fact, we are currently over-delivering on these rates with 13.6 per cent gross and 12.2 per cent net based on cumulative returns. These rates are open to all and there is no differentiation between retail and institutional investors. We will continue to structure our platform to be attractive to retail investors. This includes offering loans secured against other assets (such as jewellery or artwork) for those people who prefer to limit their exposure to property-based loans, as well as loans that offer an emotional appeal: we recently listed a £1m loan secured on a power boat (Team Britannia) that is looking to challenge the round-the-world record. This is the appeal of crowdfunding – letting the peer decide.
The role of retail
Individual investors are the lifeblood of the peer-to-peer lending industry. But will they get pushed aside by City institutions as platforms pursue serious scale? Hannah Smith investigates
ETAIL INVESTORS are the foundation on which today’s thriving peer-to-peer lending industry was built. The whole concept of P2P lending was created with retail investors in mind, based as it was on a desire to cut out the middlemen and open a direct line between individual lenders and borrowers. But a trickle of institutional money into the sector has now become a flood. With this has come some clear
benefits, such as the potential for growth, but it also raises questions about the role retail investors will play in the future of P2P. Can they remain the key focus for platforms, or will institutional cash prove too alluring? The world’s oldest P2P lender Zopa launched 13 years ago, but P2P really took off in the aftermath of the financial crisis, filling the funding gap when traditional bank lending dried up.
Iain Niblock, chief executive of P2P research provider and investment platform Orca Money, notes that retail investors were the first to adopt P2P lending and are still the largest source of lender capital. Platforms like them because they tend to stay put longer than institutional investors, causing fewer problems for cashflow. “It has been said that retail investors are more reliable and stickier than institutional investors,”
says Niblock. “If a large institution withdraws from a platform, the impact would be significant. If a retail investor withdraws £15,000, the impact would be marginal.” The ability to scale up and become more profitable is a major attraction of institutional investment in the eyes of P2P platforms, but there is also added prestige. Gaining the ‘seal of approval’ from an institution proves
retail investors are more reliable and stickier “It has been said that than institutional investors” a platform can stand up to scrutiny. Niblock says this extra layer of reassurance can help platforms attract more retail investment too. “The presence of institutional capital may further add comfort to retail investors knowing that a large institution has conducted in-depth due diligence on the platform,” he explains. There is also the issue of diversification of funding,
which was an important lesson from the global financial crisis, notes Jonathan Segal, partner and head of fintech at law firm Fox Williams. “A lot of platforms started off as pure P2P but realised that, to get any meaningful scalability, they had to look at institutional investors as well. It is also about having a solid funding base: one thing to come out of the financial crisis
was the importance of not relying on one source of money.” Although retail investors bring obvious benefits to platforms, they also come with particular regulatory requirements to satisfy the Financial Conduct Authority (FCA). For example, P2P lenders have to adhere to the regulator’s rules on financial promotions and treating customers fairly. They are expected to have
clear and transparent marketing material to explain risks to investors. They must also be careful not to imply that having a provision fund to cover bad debts means lending is risk free. The City watchdog is still in the process of reviewing the P2P sector, which has evolved rapidly in the last few years and become much more sophisticated. If the rules on how platforms deal with
retail investors are tightened, this could make institutional money look more appealing, says Segal. He notes that, to get FCA permission, platforms have to prioritise their treatment of retail investors. One big issue is about the selection of loans, although there is no specific regulation around cherry-picking, where institutions might get their choice of the best loans (whether highest return or lowest risk). “Fundamentally, what the FCA is worried about is if there are losses on the platform – will retail investors suffer them and institutional investors be protected?” he says. “If the rules get tightened up, clearly the reaction to it may be to take more institutional money.” On the downside, however, taking institutional money can put pressure on P2P platforms to change their lending criteria in order to suit their big investors who want greater control over what the platform does. And if there is too much institutional involvement, can a platform still call itself P2P? The whole point of P2P was to connect lenders with borrowers directly. But now, platforms including Zopa and Funding Circle have started to securitise loans, adding back in
layers of complexity and charges in a process of ‘reintermediation’. This is one reason why RateSetter says it is focusing on retail money, which accounts for 95 per cent of its loan book. Data from Orca Money reveals institutions lent £38m through RateSetter in 2016, compared to £626m from retail investors. In 2017, institutional funding shrank to £13m.
gets a smaller return. We are very keen that as much return as possible should flow back to retail investors. That’s at the heart of our model.” The intermediary issue also influenced RateSetter’s decision to stay focused on retail. “You can think of things like investment funds where there is retail investment on one side and they are operating through a fund, a big
thing to come out of “theOnefinancial crisis was the
importance of not relying on one source of money
“That’s a choice we’ve made; we’ve had lots of conversations with institutions but we haven’t felt minded to introduce more institutional money into the mixture,” says John Battersby, head of communications and policy. “There are lots of reasons for that. Primarily, our goal is to open up loans and lending to direct investment and, by putting institutions in between, it ultimately means the retail investor
institution or a bank to get a return,” adds Battersby. “Inevitably, that’s another mouth to feed in the transaction, you are introducing another intermediary, and that is something we are not instinctively attracted to.” Landbay is a specialist P2P platform for buyto-let mortgages which started life as a purely retail proposition but has recently started taking institutional money as well. It lent out almost £40m in 2017 and institutional money now
makes up about three quarters of its funding. Chief executive John Goodall says the success of the retail-focused business was what opened it up as an option in the eyes of institutional investors. “We started the business to provide retail investors with better and fairer options through direct lending, offering attractive and predictable returns,” he explains. “Retail lenders have been fundamental to our success and allowed us to prove the business concept in the early days. Nearly four years on and we have had zero defaults and zero arrears in our history of lending. This performance has in turn definitely opened up conversations with institutions for us.” The Innovative Finance ISA (IFISA) is predicted to be a game-changing development which will keep the UK’s P2P sector firmly anchored with retail investors. The tax wrapper opens up the sector to the lucrative ISA market, offering individuals a tax-free allowance on income from their P2P investments, akin to a stocks and shares allowance. The products have been so popular that in some cases platforms have staggered rollouts to meet demand. RateSetter launched its IFISA last month
and Battersby expects it will be key to attracting more retail investment into P2P, especially given current low rates on cash ISAs and volatility in stocks and shares ISAs. “The IFISA could be a very important development to drive people to think about P2P as an investment, especially when you look at the ISA landscape currently,” he states. “I expect we will see a material increase in take-up on what we saw in 2016/17.” Landbay’s Goodall describes the ability to put a tax-free wrapper around P2P investments
as a “landmark moment” for the industry, and proof that P2P is now firmly in the mainstream. He predicts it will attract a new wave of retail investors to the sector in years to come. So what will the P2P lending sector look like in a few years’ time? Will we see a US-style influx of institutional cash – now making up 80 per cent of P2P funding across the pond – and how much could this change the face of a sector built to serve the needs of individual borrowers and lenders? The platforms themselves pledge not to forget about their retail customers,
even if it means they have to work harder. “You can get involved with an institutional investor and substantially increase the amount of money that’s on a platform, that is a choice you can make,” says RateSetter’s Battersby. “You have to work harder for each retail customer and that’s fine with us as we think retail money can fuel sustainable growth.” Landbay’s Goodall says his platform will always focus just as much on retail as institutional money, partly because it wants scalability, and to reduce over-reliance on any one source of capital.
Niblock says Orca Money would like to see the retail investor base grow with the industry in future, and he thinks ultimately the platforms will stay true to their roots. “My view is that institutional involvement in the sector will grow, but the P2P platforms will retain a mixture of capital sources, making them more robust,” he asserts. “The true nature of P2P lending is lending directly from one individual to another party. This was the original model conceived by Zopa in 2005 and I don’t think the industry will abandon this.”
of P2P lending is lending directly from “The true nature one individual to another party”
Earn an estimated 8.7% return with our Innovative Finance ISA Join the Crowd2Fund investor community and enjoy tax free earnings on your ISA allocation this tax year when lending to great British businesses. www.crowd2fund.com/ifisa
Earnings from investments can vary between 6% - 15% APR return before fees and bad debt. Equity investments are not included within this estimated return. Past performance and forecasts are not reliable indicators of future results. Tax treatment of any of the investment offers will depend on the individual circumstances of each investor and may be subject to change in the future. When making a peer to business loan, your capital lent to a borrower is not covered for compensation in the event of a loss by the Financial Services Compensation Scheme. Crowd2Fund Limited is authorised and regulated by the Financial Conduct Authority (FRN 623683).
Leading by design
Crowd2Fund was one of the first platforms to offer the Innovative Finance ISA (IFISA) and still retains a dominant share of all IFISA funds. Founder and chief executive Chris Hancock explains why simplicity is the key to the company’s success
SA SEASON is fast approaching, and there has never been more competition in the Innovative Finance ISA (IFISA) market. But almost two years after it launched one of the UK’s first IFISA offerings, Crowd2Fund is still one of the largest IFISA providers in the country. The company’s founder and chief executive Chris Hancock attributes this to the choice they offer their retail investors. “Investors want more control over their investments,” says Hancock. “Our investors are sophisticated, successful people in their own right. We just make sure that all of our investment information is clear and accurate, and the individual can then make their own decision based on that.” Unlike other platforms which focus on highnet-worth investors, Crowd2Fund aims to bring the benefits of peer-to-peer investing to everyone. New investors can register for an IFISA within minutes, and with a minimum
investment of just £10. These IFISA investments can be spread across a number of different UK-based business loans, with targeted returns of 8.7 per cent. In the current low-interest rate environment, this is a tempting proposition for many ordinary investors who have struggled to find inflation-beating returns. Furthermore, the Crowd2Fund model allows investors to choose the businesses that they want to invest in – and if they want to divest from any of these businesses, they can sell off their loans on the Crowd2Fund Exchange. In a sense, says Hancock, this means that they are offering a “liquid ISA”. “We trust our investors,” Hancock adds. “We like to present all of our loan information in a very clear, transparent, and honest way so that the individual can make
their own decision.” This honest approach also encourages the platform’s borrowers to open themselves up to scrutiny. “Our investors can ask questions directly to the businesses, and then the business can reply, and that reply is made public to all the other investors,” says Hancock. “As a result, there is a lot more accountability placed on the entrepreneur or business director not to let his or her investors down. Their investor community are the ones that have supported the business’ growth.” To date, Crowd2Fund’s transparent and accessible business model has paid off, with thousands of dedicated investors registered with the platform, hundreds of successfully funded business loans, and a ‘bad debt’ target of just one per cent – much lower than many of its rival platforms.
We like to present all of our “ loan information in a very clear, transparent, and honest way”
Recently, the ‘big three’ lenders – Zopa, Funding Circle and RateSetter – have entered the IFISA space, a development that Hancock welcomes. “I think that the market is big enough to have multiple players,” he says. “We’ve actually got a very different proposition where the ISA is at the core. P2P lending in its original and purest form consists of platforms letting investors choose the businesses they individually want to lend to. “However, the largest P2P lending platforms in the UK have removed the facility to invest in businesses directly. This restricts choice for investors if they want more control on their P2P investments.” Looking ahead, Hancock says that his goal is to retain “if not increase” Crowd2Fund’s IFISA market share, by focusing on the things that make his company unique: a transparent and easy-touse peer-to-peer platform which offers more choice for retail investors.
The real deal
After years of speculation, M&A activity in the peer-to-peer lending sector has failed to materialise. Marc Shoffman finds out why it’s taking so long
RADITIONALLY, AS a new market matures it becomes ripe for mergers and acquisitions (M&A), but the expected deal bonanza in the peer-topeer lending sector has been more of a fizzle. Will the M&A boom ever materialise in P2P? The sector has become an increasingly attractive area for both retail and institutional investors, prompting much speculation about potential tie-ups. Analysts have heaped praise on the innovative market and the way it uses technology to bypass and provide a credible
alternative to banks. That innovation has helped the sector build up a lot of clout. The main UK lenders in the Peer-to-Peer Finance Association have collectively lent out more than £8bn, with giants such as Zopa and Funding Circle on more than £3bn each. Zopa has not gone down the M&A route yet but Funding Circle has expanded into Europe by purchasing platforms such as German lender Zencap. RateSetter, which makes up the ‘big three’ with Zopa and Funding Circle, acquired
GraduRates’ loan book in late 2014. Last summer, its widely-reported “interventions” led it to buy two of its former wholesale lending partners that had gone into financial difficulty and to acquire a stake in another. The latter, George Banco, has since been acquired by NonStandard Finance. A spokesperson said no more acquisitions were planned in the foreseeable future, and it seems other P2P platforms are following the same track. Interest from the City has also been quiet, aside from ESF Capital taking a controlling
stake in business lender ThinCats during 2015. But can that really be the peak for P2P M&A? The trouble is there aren’t enough big players, as Jamie Cooke, chief executive of FSCom, which advises on fintech compliance, explains. “Markets that thrive from M&A activity are characterised by significant numbers of companies that can scale through innovative technology,” Cooke says. “These markets are sufficiently mature that such companies are widely attractive. “This is single biggest factor for the lack of
activity within the P2P sector to date, which has been dominated by a small number of larger companies. It is also notable that the P2P market, to date, has not been of a scale and maturity to attract those institutional banks for acquisitions. “However, I do expect that trend to change in the short term because P2P lending and the market has proven to be a reliable form of alternative finance with a long-term sustainable market. With the addition of regulation this should prompt more interest from external institutions looking to acquire a presence in the P2P space.” Jon Gill, partner at UK law firm TLT, agrees with Cooke’s viewpoint and suggests that the Innovative Finance ISA (IFISA) wrapper will help build an image of reliability. “One would normally expect consolidation in a market as it matures, but we have not really seen this in P2P just yet,” he explains.
“The sector has been growing rapidly, enabling platforms to achieve scale through organic growth without needing to aggressively pursue M&A. “It will only be when growth rates drop off slightly that true industry leaders and those who are not quite as strong will be clearly identified. The recent launch of the IFISA will also encourage platforms to hold on and see how this feeds into their revenues before either looking to make acquisitions or indeed the shareholders looking for an exit event.” A big issue holding back M&A in the sector is the cost of due diligence on a transaction. Jonathan Segal, head of fintech and alternative finance at law firm Fox Williams, says a typical transaction may cost £40,000 to £50,000 in legal fees and charges to accountants, brokers and advisers, so it has to be worth the effort. “I did think there would be more M&A by now,” he comments. “Particularly when firms
weren’t getting their permissions, I thought some loan books would be sold. That hasn’t happened clearly. “It would be costly from a legal perspective to get involved if you are only talking about buying things for a few million pounds.” The cost-benefit analysis was an issue that Theresa Burton, chief executive of renewables P2P platform Trillion Fund, has been through in recent years. The platform closed to new investors in 2015 and she has been running down the platform since then, while talking to investors about purchasing the underlying technology. But that wasn’t always the plan. Back in 2015, she had considered selling the £3m loan book, but the cost of legal fees and due diligence made the deal commercially unattractive. “Completing the deal can outweigh any return you get on annual fees,” she explains. “When purchasing loan books you need to consider the liability and the data and credit
record you are getting. “You don’t get a lot of history or volume with early-stage loan books so it is harder to judge. That is why we decided to run off our loan book instead.” Ultimately, there has to be enough data to check to make the deal worthwhile, Burton adds. “For a City firm or another company to get in they will be looking at the pipeline, borrowers and origination. They will also be worried about their reputation and monetary risk. “The size of the deal has to be big enough to cover the due diligence cost.” Another major issue is regulation. Since 2014, P2P firms require authorisation from the Financial Conduct Authority (FCA), meaning that anyone purchasing them also requires the relevant permissions. “P2P platforms are now regulated by the FCA and so any material change in control of the business requires the FCA’s prior approval,” says TLT’s Gill. “This can be quite an involved process and
that thrive from M&A activity are characterised by “Markets significant numbers of companies that can scale through innovative technology”
introduces a degree of uncertainty and delay to transactions. That said, it is a standard feature of M&A in the financial services sector. “Provided that buyers approach this in a wellprepared and diligent manner, it should not be too problematic.” Conversely, the industry’s higher compliance requirements of regulation could actually encourage
M&A. Cooke argues that higher barriers to entry to the market mean that smaller players may struggle to compete and consolidation is likely to occur. Meanwhile, Gill expects to see banks and other financial institutions start looking to acquire P2P platforms to augment their existing offerings. “I believe we will see both big City firms buying into platforms
and platforms buying other platforms, although I believe the more significant story will be banks and wealth managers taking an increasing role in the sector,” he adds. However, Segal cautions that it may not be worthwhile for a bank to make a P2P acquisition as they make more money from the spread between interest paid on deposits and
funds they lend out. One new development that may help facilitate the M&A boom is the rumoured initial public offerings (IPOs) among the bigger players. Zopa, Funding Circle and RateSetter are all believed to be considering public listings, which would give them a lot of cash to splash. Zopa co-founder Giles Andrews has described a public listing as a
deal has to be big enough to cover the “The size of thedue diligence cost”
I believe we will see both big City firms buying into “platforms and platforms buying other platforms” “natural route” for the business, while there are unconfirmed rumours that Funding Circle is planning a float. RateSetter has said it would like to float in the longer term. Iain Niblock, chief executive of P2P analysis firm Orca Money, suggests a Funding Circle IPO in particular would boost the brand. “A Funding Circle IPO would accelerate
their global strategy,” he explains. “If it made sense for them to acquire other global lenders to achieve their goals I think this is possible.” Segal thinks that an IPO would put cash in the market that could be used by the P2P platforms to buy up loan books, but he warns that being listed will also bring new challenges. “Most firms are
regulated anyway so are used to scrutiny from the FCA, but once listed they will also have scrutiny from shareholders and the risk of hedge funds coming in,” he says. Another requisite of a stock market flotation is increased transparency and disclosure of the firm’s finances. “More transparency is good but the question is if a firm’s reputation
gets marred in ways private companies won’t,” says Burton. “There are a lot of people who can negatively influence your reputation when you are listed such as short sellers.” It appears that the P2P industry will need to wait a little longer – and grow a little larger – before it would be worth the due diligence to turn this sector of innovators into one of dealmakers.