P2P industry yet to see wave of consolidation

THE WAVE of M&A activity that was expected to engulf the peer-to-peer lending sector has yet to materialise.

Industries which have a proliferation of smaller players fighting to grow market share are typically prime candidates for takeovers and mergers, so why hasn’t it happened in P2P? And can all the small P2P platforms survive and thrive, or will many fall by the wayside?

Late last year, Zopa co-founder James Alexander predicted consolidation would be a feature of the P2P landscape, with just “a few big winners” emerging afterwards.

The industry already has a ‘big three’ – Zopa, RateSetter and FTSE 250-listed Funding Circle – commanding the greatest market share.

Read more: Funding Circle IPO could trigger wave of sector consolidation

Matt Hopkins, an audit director at BDO specialising in fintech, said the market landscape has changed in recent times. He predicts the two halves of the marketplace will go in different directions. He does not expect to see much consolidation within consumer-to-business lending platforms – their options will be “to be a niche player with a differentiated product, collaboration with a marketplace provider, or disappearance”.

He noted there is a significant group of small players but they are unlikely to become M&A targets. If they are to survive, they will need a unique model which sets them apart from competitors.

“If small, mono-product P2Ps are expecting advances from other players as part of an exit event strategy, they are likely to be disappointed,” he said. “Since the collapse of mini-bond provider London & Capital Finance, I do not see a strong demand from the retail investment market and this, coupled with increased regulatory attention, is likely to restrict growth outside the existing large players in this market.”

Business-to-consumer and business-to-business lenders, on the other hand, are likely to see much more sustained demand from institutional and high-net-worth investors, Hopkins suggested.

One senior industry source, who wished to remain anonymous, said the involvement of institutions in P2P lending has already removed what originally made them different.

As intermediation creeps in, P2P platforms are becoming more like banks and asset managers that find deals for institutions. The source argued that consolidation has not happened because there is little incentive for a platform to buy another platform.

Read more: 84 per cent of banks will consider fintech partnerships

They would only be acquiring the database of investors and the staff, the source said, along with less desirable things like the platform’s history and problems.

“The only asset a platform has is its ability to marry investors and borrowers,” the source continued.

“You’re not buying the borrowers, because they come along each week or each month. If you’ve got a lot of institutional money you’re trying to find a home for, the constraint on growth is finding new deals. So it would be better to invest your money in a network of people finding deals than it is buying another platform.

“Their software won’t be compatible with the software of the existing platform. You won’t be able to combine them, so you’re effectively running two platforms. There’s no real benefit in it.”

While the P2P lending industry has matured more rapidly because of technological changes, it is still a young industry, and consumers are treating it with caution, Hopkins suggested. As the newer companies in the sector begin to come of age, they will need more than just a profitable model.

“Funding Circle and Zopa tapped into an unserved customer base at the right time, which enabled them to build both brand and scale,” he said.

“Key success indicators for the next wave of maturing fintechs are likely to be customer acquisition, culture and governance, and operational effectiveness, in that order, not short-term profitability. Those who achieve the latter will achieve the best valuations, whatever the exit event.”

Read more: How P2P created an alternative form of consolidation

This article first appeared in the June issue of Peer2Peer Finance News, which is available to read here.