Innovate Finance’s Mike Carter talks to Marc Shoffman about the closure of the 36H Group and how the peer-to-peer lending sector is still being represented by the trade body…
Regulatory changes and high-profile platform exits have changed the shape of the peer-to-peer lending industry and led to a reshuffle of its representative voice.
The 36H Group, set up in 2020 within fintech trade body Innovate Finance, has been repurposed, with members now part of a P2P vertical in the wider group rather than a separate body.
Innovate Finance’s Mike Carter, who helped run the 36H Group, explains the move and the future of P2P lending representation.
Marc Shoffman (MS): What has driven the change in structure of the group?
Mike Carter (MC): When 36H was set up three years ago, it was as a separate group with its own benefits, actions and structure and at a time when our membership was not organised around industry verticals.
In the past three years, different industries in fintech have been developing. We have had significant growth in verticals such as crypto, buy-now-pay-later and payments that are now important sectors requiring focused groups and actions. Whilst these areas have grown, P2P has gone in the other direction due in part to the regulatory direction and due to the big players exiting retail. The platforms who set the group up have exited retail P2P, with CrowdProperty remaining as the only original member.
The fact that the sector has seen several pull-outs is in part a reflection of diversification – it is strategically important for any business to diversify its funding, whether it is a P2P or a bank lender. That’s part of the evolution of becoming a larger lender. Our submission to the Financial Conduct Authority (FCA) on its financial promotion rules consultation highlighted that 90 per cent of the sector by value of written loans has stopped doing retail operations and Funding Circle, Zopa, and RateSetter were important players.
This is a big shift. We took the view that the sector doesn’t justify having a separate group with its own payment structure and proposition for P2P members. It is far more beneficial having them as full members so they can access different areas in our membership. P2P lending platforms have many issues they care about. Business lenders, for example, have been focused on government loan schemes in the recent years, and currently there is also work around consumer duty and the upcoming changes to the consumer credit act.
MS: Is there still space for retail-focused P2P lenders?
MC: We are very positive about retail P2P lending and it is still a great example of fintech innovation. However, as it is a more restricted universe of investors, we have to plan accordingly. Wearing my other hat, our retail lenders at The Money Platform remain keen on investment in the product. There are many other constructs for accessing retail investors – see for example AxiaFunder. This shows that there is retail demand for alternative investment as investors don’t care too much about the investment structure, they are more interested in the asset class and the quality of the asset.
MS: Has your job changed?
MC: My role has changed over the past few years, during Covid-19 and beyond. I spent a lot of time working with business lenders on the government guarantee programmes. I have been running a small- and medium-sized enterprise (SME) lending vertical through and since Covid. I also took on leading the Innovate Finance capital and investment programme, analysing and publishing data on capital invested in fintech every six months.
MS: Why do you think P2P firms have been exiting the retail space?
MC: Looking at statements that companies have made, regulation appears to be the main driver. We listed those out in our submission to the FCA.
Read more: Innovate Finance’s 36H Group absorbed into trade body
MS: Are there limits to retail funding?
MC: Some platforms have concluded they couldn’t get the volumes they needed. When they tried to access other sources, they found perhaps in some cases that they were cheaper and easier to deal with than having a retail investment platform. They thought that if they can receive institutional money, then they wouldn’t need the cost of running a retail platform. For example, if you are a P2P SME lender, your loans aren’t a regulated product typically, you are only regulated by dint of your P2P investment side – if you close that retail side you are largely outside of the scope of regulation.
MS: Why is property still popular among retail P2P?
MC: When you look at the top 10 P2P lenders, eight are probably property lenders. Retail investors like property as an asset class. It is more easily understood and secure. Platforms such as Folk2Folk and CrowdProperty have had zero losses for investors since inception. That doesn’t mean that they have zero defaults; they have however managed to collect on loans, which is an amazing track record and this is partly due to the asset class. Most of the property platforms are writing relatively short-dated loans while SME loans are typically three to five years. Additionally, property platforms can adjust underwriting criteria quite quickly and this is attractive.
MS: What are the current cohort of retail-focused P2P lenders doing right?
MC: They are delivering returns they said they would deliver, whether it’s property, SME or consumer loans. This is important as investors want to get what they expect. Delivering on expected returns is a key requirement, when platforms don’t do that then investors lose faith.
Read more: P2P well placed for a recession
MS: What are your priorities for P2P lenders?
MC: At the moment everyone is waiting to see the impact of the new financial promotions rules, implemented in February. It is important to give this a chance to bed in, then stand back and see what the impact is. However, we will have to wait several months to assess this. I believe that in general retail investment markets have been subdued due to the recession, so it is difficult to form a view on the rules straight away.
Consumer duty is very relevant for everyone too. Across the market, everyone is working out what they need to do to comply with the new consumer duty regulation. It is outcomes-focused so everyone will look at investor returns as a starting point, but customer service and other areas such as communication remain also important. This will dominate the mindset over the next 12 months.
