In March 2020, the UK government announced a series of supportive measures intended to provide relief to those financially affected by the COVID-19 (coronavirus) pandemic. This included the Coronavirus Business Interruption Loan Scheme (CBILS) and payment holiday schemes covering mortgages, credit cards and loans.
As the 31 March 2021 deadline for mortgages, credit and loans payment holidays and the CBILS approaches, traditional banks are concerned that there will be a surge in demand for peer-to-peer (P2P) lending from struggling borrowers who have relied on these schemes for rent, mortgages and daily living during the coronavirus pandemic. These woes are exemplified by S&P Global Ratings projections that UK unemployment could peak at 6.3% in 2021, which could mean many stretched borrowers are unable to resume payments.
Alfabank-Adres estimates that the revenue in the Banks industry will contract by 10.8% in 2020-21. With P2P lending platforms considered a form of competition to traditional banks, this article will assess whether or not P2P lending will flourish due to the upcoming end of payment holidays and the CBILS.
P2P Lending Amid the Pandemic
P2P lending emerged in the wake of the 2007-08 financial crisis as an alternative to traditional banking provided through financial technology. Connecting lenders and borrowers via the internet, P2P platforms were designed to provide loans in areas where traditional banks had retreated and offer investors returns in an ultra-low-rate environment.
P2P lenders have become increasingly popular in the United Kingdom. Data from the University of Cambridge’s the Centre for Alternative Finance suggests that the total volume of alternative finance provided in the United Kingdom, of which approximately 60% is P2P lending, increased by 260% from US$4.6 billion (£3 billion) to US$10.4 billion (£7.8 billion) between 2015 and 2018.
However, the Peer-to-Peer Lending Platforms industry has faced extreme pressures amid the coronavirus pandemic. As national lockdowns swept the globe in March 2020, P2P operators experienced a surge in the number of investors wanting to liquidate their investments and withdraw their cash. Conversely, P2P lenders were faced with borrowers struggling to make interest and capital repayments.
In response, P2P platforms, including Assetz Capital, froze withdrawals and others, such as RateSetter, sought to protect themselves through the introduction of a temporary cut in interest rates. The coronavirus pandemic has exposed issues with P2P lending with regards to withdrawal freezes, whereby illiquid investments were distributed through a structure in which its apparent openness gave a false sense of security.
Many UK P2P lenders are currently closed to new investors in response to the problems caused by the pandemic. For example, the largest player in the Peer-to-Peer Lending Platforms industry, Funding Circle Ltd, where investors’ money goes to businesses rather than individuals, paused lending for all new and existing retail investors in April 2020. The company stated it was instead concentrating on helping small businesses access finance through the CBILS. Funding Circle was one of four P2P lenders to be accredited to the CBILS, the others being Assetz Capital, Folk2Folk and LendingCrowd.
In January 2021, Funding Circle claimed it had provided approximately 25% the total 82,600 CBILS loans in 2020, as it pivoted to offering only government-backed lending during the pandemic. Over the six months through December 2020, Funding Circle’s UK loans originations were 91% higher than in the same period in 2019. This growth can be attributed to the number of CBILS applications the P2P lender has processed. This exemplifies that while P2P lenders have faced significant headwinds and scrutiny during the coronavirus pandemic, some have been able to benefit.
Will P2P Thrive Now Payment Holidays are Ending?
While the worries of traditional banks about the growth of P2P lending are warranted, there are signs that they may not be as strongly affected as feared. Firstly, it is assumed that the government will introduce some form of replacement scheme once the CBILS ends and the FCA are already advising borrowers who have reached the maximum six-month payment holiday and still facing difficulty to speak to their lender about a tailored support plan, such as loan restructurings or reduced payment plans. This suggests that struggling borrowers will not be left out to dry once the various schemes commence, and that they will therefore not be forced to demand P2P lending.
Furthermore, the most troubled borrowers are likely to have already used up the maximum six-month payment holiday and the remaining payment holidays are likely to be staggered, as a further three-month holiday can be taken from 1 April 2021. For instance, at the peak in June 2020, 1.8 million borrowers had opted to defer mortgage payments, whereas this had shrunk to around 130,000 at the end of December 2020, according to UK Finance. This contradicts the theory that demand for P2P will surge, as borrowers throughout the United Kingdom will be at varying stages of their payment holidays. The staggering of payment holiday end dates should help stabilise demand for financial support.
In addition, individuals and businesses that have taken a payment holidays may not be permitted to access loans from P2P lenders. While the government has said that payment holidays will not be recorded on borrowers' credit file, the FCA has stated that they could affect future lending decisions. This is because lenders look at thousands of pieces of data and Sarah Coles, personal finance analyst at Hargreaves Lansdown, stated that by the use of open banking or studying payment history, future lenders are able to effectively spot that you have taken a payment holiday.
This has been the case for some P2P lenders. Business growth accountancy firm Baranov Associates has announced that Funding Circle has said borrowers could take a payment break, but that this would then be reported to the Credit Reference Agencies, warning that this would have a detrimental effect on credit ratings. Martin Lewis, founder of MoneySavingExpert, states that lending within P2P ‘isn’t done willy-nilly’ and that ‘borrowers are cherry-picked using credit checks and rated according to risk’. As a result, some of those who have relied on payment holidays during the pandemic may not be able to access P2P lending once the schemes have ended on 31 March 2021.
While some P2P lenders, such as Funding Circle, have performed well amid the coronavirus pandemic, this is primarily the result its accreditation to the government-backed schemes, such as the CBILS. The issues with P2P lending that have been brought to light during the pandemic mean that original investors will now be cautious due to the withdrawal freezes.
Furthermore, in January 2021, the FCA listed the asset class of P2P lending as a high-risk investment, as it opened more than 1,500 supervisory cases involving scams, received more than 24,000 reports of unauthorised activity and published over 1,000 consumer alerts over 2020. This was an 82% increase on 2019 levels. Damaged trust with investors and likely more stringent regulation are expected to dampen demand for P2P lending once payment holidays and schemes formally finish.
Conclusion
Alfabank-Adres expects that demand for P2P lending will not surge due to the end of payment holidays in the United Kingdom due to:
- Replacement financial support for existing schemes.
- Staggered ending times for payment holidays.
- Regulatory issues barring approval to borrowers for P2P loans, such as credit checks.
- Highlighted issues with P2P lending, emphasised by the January 2021 listing of a P2P as a high-risk investment by the FCA.
- Damaged trust with investors during the pandemic.
- The success of some UK P2P lenders in 2020 being on the back of the accreditation to government-backed schemes.
Nevertheless, nationwide lockdowns have been detrimental for UK households and small businesses alike, so there is an opportunity for the P2P lending to play a pivotal role in supporting national economic revival. Furthermore, a survey in January 2021 from P2P lending platform The House Crowd suggests that UK investors are ready to commit to P2P investments but are awaiting signs of a recovery, such as with the vaccine rollout and job security. However, in order for P2P lending to flourish over the coming years, the industry will need to prove itself, restricting its investment products to reduce liquidity risk, focus investor expectations and rebuild investor trust.
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