MARKET FOCUS REPORT STRUCTURED FINANCE

JULY 1, 2015

THE FUTURE OF PEER-TO-PEER (P2P) LENDING

OVERVIEW
P2P lending is the practice of advancing money to unrelated persons, or "peers", without going through a traditional
financial intermediary such as a bank. The unprecedented development and innovation of the UK alternative finance
market since the financial crisis has seen P2P lending emerge as a potentially viable and sustainable alternative to
conventional sources of funding.
P2P Lending is facilitated by online platforms, with investors able to browse a catalogue of loans, before making
investments and ultimately building a portfolio with investment minimums as low as 100. As of September 2014, the
largest classification of P2P lending (by loan volume) was business lending, closely followed by consumer lending. P2P
loans are typically unsecured, and are not covered by the FSCS Deposit Protection Scheme.

THE P2P PROPOSITION

P2P lending is unquestionably experiencing a surge in popularity. According to an independent survey of the UK
Alternative Finance Industry, P2P lending grew 150% to 666m in 2013, 161% to 1.74bn in 2014, and is expected to
reach 4.4bn in 2015 (NESTA, 2014).
ARC believes a number of key factors are fuelling this current rapid growth:
1) With interest rates at rock-bottom, and savings accounts providing negative real returns (and risk-free securities
little better), investors desperate search for yield continues. Importantly, most are equally aware of the dangers
inherent in venturing too far along the yield curve under such conditions. With many P2P investments offering a
yield pick-up of 3-8% over bank savings, it is understandable, perhaps, that the strategy for many has been to
rethink, not rebalance.
2) The technological and operational efficiency of new age, purpose-built P2P businesses has unquestionably left
commercial banks struggling to compete - both in terms of the rates offered to borrowers, and the speed at which
loans can be approved and extended. Banks are also burdened by far greater capital and lending
regulation/restrictions than P2P lenders, further compromising their agility in a rapidly evolving environment.
3) P2P lending has received substantial press coverage of late, and although alternative finance is considered a new
phenomenon, a recent independent survey found consumer awareness to be relatively high with 58% of
respondents expressing knowledge of at least one type (NESTA, 2014). As investor awareness continues to develop,
one can reasonably expect inflows into P2P assets to grow concurrently - particularly given the current investment
landscape and the risk/reward profile of P2P investments.

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4) Whilst it is arguably too early to draw empirical conclusions on the correlation of P2P investment returns with those
of traditional asset classes, many consider the efficacy of P2P investments as portfolio diversifiers to be potentially
significant.
5) Much to the disappointment of P2P lenders, the Chancellors 2015 Budget failed to bring P2P investments onto the
list of those permissible within the ISA framework. Nonetheless, it remains a conceivable change, and P2P platforms
and lenders remain optimistic.
Whilst independently, these factors might cause one to raise an eyebrow, collectively they support the notion that P2P
lending could soon see itself positioned alongside traditional asset classes.

DECISION TIME
Investors are inherently skeptical about new asset classes. Since most P2P loans are not protected by any government
guarantee, the involvement of the P2P company facilitating the loan presents another dimension of capital risk.
Consequently, investors must not only choose each investment with great care, but also the P2P platform itself and
make no mistake, competition is already extremely fierce. In light of the above, a Servicer Quality rating issued by ARC
Ratings can address a principal consideration for investors.
The benefits of an ARC Ratings Servicer Quality (SQ) rating are twofold:
1) For investors, an SQ rating offers a convenient and reliable means by which to compare and evaluate P2P platforms.
Investors can take comfort from the knowledge that a servicer has received a comprehensive specialist assessment,
and thus make more suitably informed decisions.
2) Experience teaches us that those entities surfacing as the early favourites, often win the race. For P2P platforms, an
SQ rating is a powerful tool for attracting and instilling confidence in potential investors. Furthermore, an SQ rating
highlights sources of internal efficiency and competitive advantage, and can therefore also support optimal
decision-making for P2P businesses, as well as being a useful first step input towards structuring a securitisation.
On 23rd June 2015, ARC Ratings published its first Servicer Quality Rating for LendInvest Limited. The full report can be
found at: www.arcratings.com.
www.arcratings.com For more information on obtaining an ARC Ratings Servicer Quality rating, contact
details can be found below.

THE FUTURE OF P2P

Many consider securitisation a likely natural evolution for P2P assets. For many investors, the ability to receive instant
exposure to a diversified pool of P2P loans through a single investment, will be very appealing. Furthermore, not only
do rated tranches represent a familiar guiding framework for investors, they may also enable the purchase of P2P assets
by funds with restrictive investment criteria (e.g. rated securities only).
Although the current outlook is encouraging for P2P lending, it would be imprudent not to also consider potential
headwinds. Increased regulatory requirements for P2P businesses, negative publicity, or a slower than expected

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investor uptake could all impede the future of P2P loans as a prospective major asset class. Rising interest rates, leading
to a subsequent escalation in the return available on risk-free assets (i.e. government securities) could also weaken the
relative attractiveness of P2P investments.
Overall, ARC Ratings believes P2P lending will continue to gain increasing traction throughout 2015 and 2016,
ultimately emerging as a strong and prominent alternative asset class.
ARC Ratings has significant experience in according ratings to a broad range of securitisations. In rating securitised P2P
assets, ARC may apply a hybrid of RMBS and Consumer ABS methodology, or a bespoke methodology depending on
the characteristics of the underlying collateral. ARC is also considering developing full rating methodologies for a range
of specific P2P subsectors, including student loans and secured business loans. For more information on obtaining an
ARC Ratings P2P securitisation or Servicer Quality rating, please contact us using the details shown overleaf.

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ARC Ratings, S.A.

180 Piccadilly
London W1J 9HF
UNITED
UNITED KINGDOM
Phone:

+44 (0) 2032 827594

E-mail:

arcratings@arcratings.com

Site:

www.arcratings.com

Analytical
Analytical Contacts
Contacts:
Edward Beecroft
Structured Finance Analyst
Phone: +44 (0) 7804 770717
E-mail: edward.beecroft@arcratings.com
EmmaEmma-Jane Fulcher
Head of Structured Finance
Phone: +44 (0) 7889 263197
E-mail:
mail: emma.fulcher@arcratings.com

ARC Ratings, S.A. is registered as a Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA), within the
scope of the REGULATION (EC) N 1060/2009 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL, of 16 September, and
recognised as External Credit Assessment Institution (ECAI) for Corporates by the Bank of Portugal.
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financial commitments (principal and interest) subject to rating.
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documents that substantiate the rating to be attributed (the preliminary rating report). This entity is thus given the opportunity to clarify
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