Raising Finance

Will regulations dampen the success of P2P lending?

5 min read

05 November 2019

Features Editor, Real Business

Worth some £10bn globally, it seems that P2P lending really is taking over the world – and small businesses can benefit from it most. But what effect will new regulations have on the sector?

Peer-to-peer lending (P2P), is one of the most innovative ways in which businesses and consumers can gain finance today.

Allowing lendees to be matched with the right lenders via the immediacy of online platforms, P2P is no doubt one of the easiest and most accessible forms of lending out there.

The origins of P2P lending

A much-loved practice in Asia, P2P lending and online marketplaces generally have formed part of the region’s story of rapid digital innovation.

This has been seen in China, where its rural population being unable to access traditional banks, lept rapidly to online banking and P2P platforms as soon as they were created – where the success of Alibaba’s Alipay is but one example.

However, disruptive industries working at the frontier of new processes can also create concern, one of these concerns in the case of P2P lending is the question of regulation.

The regulation(s) issue

Now reputed to be worth some £10bn globally, and used across the world, (predominately in Asia but growing in Europe), the P2P industry has reached a size and valuation that demands regulation, just like other global sectors.

Back in 2015, a research paper on the topic stipulated concerns about whether regulations, (already being implemented across the industry since 2014), could keep pace with the growing and expansive sector.

The fact that new regulations are being implemented again in late 2019 show that the sector hasn’t been properly safeguarded against risks, nor its stakeholders and investors adequately protected.

Stopping another ‘Lendy’ happening…

Advocates of the new regulations believe the sector will be made more sustainable as a result.

The hope is that fewer firms will engage in the reckless lending terms and a lack of transparency with investors that saw P2P company, Lendy go to the wall earlier this year, (and investor funds with it).

The UK Financial Conduct Authority, (FCA) has now released the details of its latest regulatory framework for the P2P sector, the effects of which will come into effect in December 2019.

“Regulation on alternative lending companies brings banks and alternative lenders closer together and increases both competition and public trust in our industry. Increased regulation is a logical step for the industry, and means more credibility and transparency for our customers and increased trustworthiness of fintech for investors.” – Roberts Lasovskis, TWINO

Included in the new regulations is the need for lending platforms to be transparent, including sharing important information with investors and enforcing stricter governance around risk management.

A more sustainable and trustworthy industry

Regulations could also make the sector appear more trustworthy to potential customers who were unsure of engaging with it before –  potentially leading to more engagement with and growth for the industry as a whole.

“We welcome the new regulations as we believe they will increase investor confidence in a rapidly growing sector, with £3 billion in loans being facilitated in 2018 alone.” – Roxana Mohammadian-Molina, BLEND Network

A safe, prosperous and regulated P2P sector is good news for SMEs, where instead of courting the services of a select few banks, they can simply post their P2P request online and make contact with potentially thousands of interested lenders.

Good news for SMEs

If seeking traditional forms of funding feels like a court petition, P2P can feel like a supermarket for small businesses.

For SMEs with minor cashflow issues, P2P loans can be received in a matter of hours in contrast to the laborious levels of bureaucracy and process of waiting for a bank loan to come through.

Following the news of these more concrete regulations, P2P lending could become the best way for small businesses to access the funding they need quickly, safely and easily.

What’s more, a regulated P2P sector could attract more of the country’s 5.82m SMEs to their platforms generally –  making it a mutually beneficial B2B ecosystem.