The promise and perils of alternative market-based finance: the case of P2P lending in the UK

Vincenzo Bavoso

doi:10.1057/s41261-019-00118-9

Abstract

The collapse of the global financial industry in 2008 and the subsequent decay of most Western economies into a period of prolonged economic stagnation have represented a springboard for the progressive growth of alternative channels of financial intermediation. The reluctance and inability of mainstream banks in the post-crisis years to provide credit facilities to the real economy, most critically to start-ups and small and medium-sized enterprises, propelled the latest wave of financial innovation, this time under the guise of FinTech. Much has been written on the rise of FinTech in recent years, but there is still insufficient clarity about the benefits that this phenomenon is bringing to the real economy and the potential risks that can arise from its growth. This paper maps the development of FinTech lending platforms in the UK and reconceptualises the rationale for their growth. In doing that, this study focuses on the structure and operation of the main UK platforms, recognising that while some are effectively banks that adopt a technology-based business model, many platforms operate under the P2P business model. The question then is to assess the policy and regulatory approach that is relevant to UK P2P platforms. Interestingly, the emergence of P2P securitisation raises a number of regulatory and policy questions, because longer intermediation chains typical of securitisation may well defy the social and economic purposes under which the idea of P2P developed. Furthermore, questions of systemic risk inevitably resurface in these types of transactions. Ensuing problems related to the best way to regulate these new channels of financial intermediation lead to critically evaluate the initiatives launched by the UK FCA, initially under the Innovation Hub, and more recently under the consultation for a new regulatory framework.

Highlights

This article takes a step back from the hype2 associated with the recent boom of FinTech in the UK
Much has been written on the rise of FinTech in recent years, but there is still insufficient clarity about the benefits that this phenomenon is bringing to the real economy and the potential risks that can arise from its growth
This article takes a cautious stance on the recent growth of the FinTech phenomenon in the UK and in particular of alternative, market-based financial intermediation taking place on P2P platforms

Summary

Introduction

This article takes a step back from the hype associated with the recent boom of FinTech in the UK. While the range of services offered by these technology firms can be wide, this article looks at the business model of P2P lending platforms The idea behind these platforms is that they represent an alternative, market-based channel of financial intermediation, allowing parties to bypass the role traditionally offered by banks, both with respect to the provision of loans and the taking of deposits.. From market players’ perspective, the above problem proposes again questions of credit risk, because the rating provided by the platforms and disclosed to investors is not sufficient to protect lenders from the variability of default and loss over the business cycle—notwithstanding the platforms’ practice to diversify the loans among many borrowers.. The FCA in particular refers to complexities deriving from the administration, servicing and managing of the underlying loans

Disclosure of investment risks

Findings

Concluding remarks