UK Alternate Finance volumes hit record breaking £746.4m ($1.5bn) lent in last quarter - more than whole of 2013!

A Record Breaking End to a Record Breaking Quarter

By Sam Griffiths on 20th October 2015

Origination volumes for the Liberum AltFi Volume Index in the month of September were £274.9m. This was a record breaking end to a record breaking quarter that saw £746.4m of finance originated by the UK Alternative Finance sector. To put this into context, this quarterly origination total surpasses the total origination of the sector for the whole of 2013 which stood at £652m.

The chart below shows that the industry has resumed its growth trajectory after a quieter month of August. Six platforms posted record monthly lending figures including each of the top three.



Zopa originated the most of any platform, posting £58.3m and setting a new industry record in the process. September was the third consecutive month that Zopa has topped the origination tables. We have previously identified that the major driver in Zopa’s recent growth has been institutionally funded loans. September was no exception with 63% of loans being funded by institutions.

Funding Circle took second spot with £53.6m of lending, bettering their previous biggest month by over £6m and lending over £50m in a month for the first time ever. Taking the final place on the podium this month was RateSetter, lending £47.5m, a new platform best by £4m. In the middle of the month RateSetter announced that institutions were once again lending through the platform and, whilst this was a modest amount (£800k) this month, we wait to see what impact it could have going forward.

Other platforms that posted record months were:

  • SavingStream with £16.1m lent
  • Landbay with £2.6m lent
  • Platform Black with £5.8m of invoices traded – a notable uptick in activity on recent months



Looking at the quarter as a whole:

  • Over half (59%) of the platforms within the Index reported record origination volumes.
  • The fastest growing sector was Equity Crowdfunding with 169% growth over the last 12 months.
  • The fastest growing lending sector was property backed lending which has exhibited 109% growth over the past 12 months.

Year to date lending for the sector stood at £1.97bn at the end of September. At the end of last year, we predicted that 2015 lending would be £2.85bn, with 3 months to run, the industry looks like it will come very close to that figure, indicating that it has stayed on its growth trajectory.


P2P: interesting UK study analyses recession risks

 p2p 1

Hand over your money to hundreds of strangers, trusting that they pay the money back plus interest: it sounds like a venture for the most risk-prone of investors – or the plain reckless.

Yet peer-to-peer (P2P) lending has exploded in popularity. In a decade, £2.6bn has been lent out by 100,000 Britons in peer-to-peer loans with investors putting away around £6,000 each. It matches the typical amount held in cash Isas.

The Government has noted this and will, from next April, allow the inclusion of these “savings” in Isas.

Research published today predicts this will lead to a fourfold take-up. Yorkshire Building Society said 405,000 savers will plough their money into the new tax-free accounts. The Peer-to-Peer Finance Association (P2PFA) expects the sector to double in size every six months for the foreseeable future.

Ben Hammond and his wife, Sophie, pictured, are among those already hooked, with 15pc of their savings in P2P.

The industry began life a decade ago, with savers lending money directly to borrowers. Cutting out the banks hands both sides a better rate.

Peer-to-peer: track record

The typical lender earns 5pc – easily beating traditional savings. But some experts are concerned. These firms are not covered under the Government-backed compensation scheme that protects deposits up to £85,000, per financial institution, if it goes bust, falling to £75,000 in January.

Despite the risks, no investor has lost money using the four biggest platforms: Zopa, RateSetter, Funding Circle and Landbay, they claim.

So far the “default” rate, the proportion of money not repaid, among P2P borrowers is less than 1pc. But these big players also hold a “reserve fund” which compensates if too many borrowers default (see the below chart).

p2p 2

But chartered financial adviser Patrick Connolly of Chase de Vere said that most advisers won’t recommend P2P. “This is a growing market that hasn’t been tested through a long and difficult period. As it becomes more and more popular we see new entrants coming to the market and they are of lower quality,” he said.

Among the newcomers is failed firm TrustBuddy, which this week froze all lender cash due to suspected misconduct. The Swedish firm has halted new business due to concerns it was giving lenders’ money to fund existing bad debts. It opened for lending in 2013 offering Britons rates of up to 12pc. The typical rate across the industry is just 5.2pc. It has now frozen an estimated £20m.

“I don’t know of any financial advisers who would promote peer-to-peer simply for this type of scenario – there is no compensation if a P2P firm folds,” said Mr Connolly.

Data from the Financial Conduct Authority, which has regulated P2P since 2014, shows 30 firms have so far withdrawn applications for approval.

Peer-to-peer Isas: what we know so far

From April 2016 new “innovative finance” Isas mean savers will be able to put in £15,240 sheltered from tax. It will undoubtedly improve the attraction, and the credibility, of P2P.

The Hammonds, who live in Hampshire, are among those who would benefit. “I’d definitely wrap my loans in an Isa as I’m a higher-rate taxpayer,” said Mr Hammond, a property lawyer. He said the traditional “safe havens” for cash did not offer attractive enough rates and that peer-to-peer had become a “place where my money is safe but I also get a reliable return”.

  Photo: Philip Hollis

Mr Hammond, 41, began with Zopa, the biggest and oldest firm, and which lets you fund unsecured personal loans.

“I quickly decided I knew property better and decided to switch to Landbay, which lends to landlords. That way, I knew if they could not repay their loans there is the asset to fall back on,” he said.

The Hammonds are expecting a baby next month and want less risk. He now earns 3pc plus Bank Rate.

When “innovative finance” Isas are available, savers will be able to lend through just one peer-to-peer platform in the Isa. The Government has yet to confirm if old Isas can be transferred to the new one.

What could burst the peer-to-peer bubble?

History tells us that bad borrowers play a large part in economic meltdowns. When bankers ploughed investors’ money into the mortgage market before the credit crisis in 2008, they took on more and more risky borrowers.

A similar spiral could conceivably happen, warned Neil Faulkner of 4thWay, a risk rating agency.

There is a shortage of borrowers. Mr Faulkner said: “As the peer-to-peer lending platforms grow they also, to an extent, have to accept worse borrowers. This imbalance could worsen causing some firms to lose their discipline and take on bad borrowers in a bid to stay attractive to lenders.”

Zopa, with £789m on its loan book, is a “victim of its own success”, said Mr Faulkner, because it has too few borrowers. It used to accept 1pc of applicants but now takes on 20pc, although this is similar to the acceptance rate for bank loans.

Landbay also took on more risk in response to demand from lenders. Previously it would only approve buy-to-let mortgages with a 28pc deposit but will now accept borrowers with 20pc.

As investors pour into peer-to-peer, interest rates will drop making it less attractive. “In this way, we could see a ‘see-saw’ effect when the lender-borrower imbalance goes the other way,” said Mr Faulkner.

For the first time, peer-to-peer firms have been subject to a “stress test” similar to those imposed on banks which models the impact of a recession on their loan book.

Tests carried out by 4thWay show lenders using the biggest P2P firms, who lend over a five-year period, should not lose capital during a crisis. They assume a severe scenario: a one in 100-year recession, roughly as extreme as the 2008 credit crisis.

• How safe is peer-to-peer lending?

Only one firm, Zopa, was around to endure the last crisis. But now that it accepts more borrowers the impact could be worse, warns Mr Faulkner. The Zopa “reserve fund”, currently 2pc of money lent out, would be completely depleted once its loan book loses £13m of its £448m stock. Each investor would lose 3pc, which would be paid for over one year’s interest.

Funding Circle lends directly to businesses, broadly reflecting UK industry, including 15pc retail, 11pc construction and 6pc agriculture.

Its co-founder James Meekings said its “no start-ups” rule and average age eight of its businesses, meant it would be able to weather a recession where bad debts increase by 65pc. Its own stress test conducted by consultants, Hymans Robertson, showed rates would drop 7pc to 5pc.

p2p 3

4thWay predicted Funding Circle investors who lent only to the safest businesses – its “A+” borrowers that return 5pc a year – would face losses of around 5pc of their original investment. This would be covered by interest earned, it said. But lenders who opt for its highest-risk businesses except those placed in its new “E” grade – where expected returns exceed 7pc – could lose 9pc which would not be offset.

Landbay, the only firm focusing exclusively on buy-to-let mortgages, carried out an independent test by consultancy firm Wriglesworth. Lenders would see their returns drop from around 7pc to 5pc during a recession as rent arrears would reduce landlord income by 6pc.


Incentivise savers to boost investment for growing businesses

Australia and the UK face similar productivity problems and a big part of the problem is access to finance:  

Incentivise savers to boost investment for mid-sized firms

Long-term approach essential for growing firms’ funding

Offering tax incentives to savers who commit to providing long-term finance for medium-sized businesses (MSBs) would help growing firms realise their full potential, according to a new CBI/BDO report.

Read the CBI/BDO Stepping Up report here

Stepping up: fixing the funding ladder for MSBs recommends ways the Government can encourage long-term debt and equity investment in these firms. The ‘forgotten army’ of Britain’s businesses, MSBs represent just 1.8% of companies, but generate nearly a quarter of private sector revenue and make up 16% of total employment.


InvoiceX no need to be sitting in Sydney nor Melbourne -

By Glenn Hodgeman on 22nd June 2015

A new dedicated invoice financing platform called InvoiceX is operating out of Hobart in Tasmania. A long way from the market noise of Sydney or Melbourne with government and corporate funded incubators and banks desperately stepping all over one another trying to be seen as leading the fintech race in Australia, but as always oblivious to where the real creativity is happening. Earlier this week Dermot Crean and I spoke about InvoiceX, the growth in their business, his views on the market and more importantly why did he set up a platform in Tasmania?

For those readers outside Australia, Hobart is located some 1600 kms or 32 hours by car from the central financial district of Sydney. Dermot moved to Australia in 2011 with his Australian wife and children and based himself in Tasmania. As we both agreed the cost of living for developing a small business platform down there couldn’t be better, a first class university of IT graduates and not to forget a climate a lot closer to the UK than it is Sydney.

As Dermot says “Hobart is also a great ‘lab’ for getting a business like this off the ground. It’s easier to get buy-in from bank managers and investors plus referrals.”

Nevertheless it is essential to recognise that InvoiceX  is operating right across Australia.

  • One of their largest clients is in Brisbane and is scaling up to do about $650k a month in trades
  • They have another client in the pipeline in Victoria that is likely to be over $1m a month
  • Another very happy client in the CBD in Sydney around the corner from Stone & Chalk (Fintech Hub).

Dermot founded the company with Steve Yannarakis some 18 months ago, and at the beginning of 2015 they opened the platform for business. Dermot has over 30 years of experience in financial services. Growing up in Ireland where his father was a bank manager. He qualified as a Chartered Accountant with Price Waterhouse in London, then worked for banks such as HSBC and NatWest in senior positions. In 2001, Dermot co-founded his own business which over a 10 year period became a market leader in raising investment funds focused on small-medium sized businesses. During this time, he was always struck by the lack of funding sources available for growing businesses, especially those with high quality customers and long payment delays. Along the way, he became involved in confidential invoice discounting in the UK as an investor which prompted some creative ideas on how to apply this in Australia.

It’s clear to me that Dermot is really focused on the central theme that growing a company is all about managing working capital and recognises the stress and anxiety that this can cause business owners. How do you make payroll this week, when most of your blue chip clients take on average of 51 days to pay their bills? You cannot rely on the Australian Banks as they continue to direct about 95% of their lending into mortgages, small business is not their focus.

This is the problem that Dermot and Steve are addressing here in Australia with InvoiceX, their on-line marketplace for working capital finance. The process is straight forward:

  1. Invoice is sold to IX Investors online.
  2. Invoice is paid and IX settles the trade. Settlement is totally automated through to batch file preparation using their User and Management Platform called IX Trade. While BDO the international accounting firm continuously audits the process.

One of the reservations that many small businesses have who are considering using invoice financing is they don’t want their premier customers to know that they need short term funds and are selling off their invoices. So Dermot and Steve have spent a lot of time working through  the creation of robust legal documents to ensure confidentiality is maintained. A combination of confidentiality and pay-as-you go, sets the platform apart from its competitors.

Finally, they have just hired a leading strategic marketing agency in Sydney (they’ve worked with CommSec, Sony, Tyroetc). A lot of work to be done on brand positioning etc, but another reason you will likely to seeing more of InvoiceX. Unlike many of the newer platforms that have recently opened, business for InvoiceX remains solid and growing. In light of that, I asked Dermot what his exit plan was for InvoiceX, he laughed and said “to be carried out in a coffin”.  A little drastic I suggest, but this is a business clearly he and Steve believe in and are looking to build into the future. Cleverly addressing a pressing problem for Australian small businesses and it’s all about working capital. I like their model very much.


Banks and startups must collaborate for 'Fintech 2.0' revolution

Having made their mark in relatively safe areas such as payments and P2P lending, fintech firms are now preparing to move into the middle and back office, giving them a multi-billion dollar opportunity to help reboot financial services, but only if they collaborate with the establishment, according to a new paper from Santander InnoVentures, Oliver Wyman and Anthemis Group.

Over the last decade, fintechs have taken advantage of the boom in digital technology and their lack of regulatory oversight to build single-purpose offerings in areas where they can beat traditional financial services players.Dubbed 'Fintech 1.0' in the Santander lexicon, this has proved relatively successful without posing a significant threat to incumbents or shaking up the banking landscape in the way that markets such as travel and entertainment have been disrupted by the digital revolution.However, the authors claim, we are now preparing to enter 'Fintech 2.0', as open data and APIs, cloud computing and intense cost pressures combine to push fintech firms deeper into the heart of banking, fundamentally changing the infrastructure and processes at the core of the industry.

The paper argues that the best way to face this oncoming change is for fintechs and established firms to work together. "This is the central premise of this report: that, to realise the opportunity of Fintech 2.0, banks and fintechs will need to collaborate, each providing the other with what it now lacks, be that data, brand, distribution or technical and regulatory expertise. Only by collaborating will the opportunity of Fintech 2.0 be realised."

Among the areas investigated are the applications for the Internet of Things, how to be smarter with data, and creating frictionless processes and products. Examples highlighted include the streamlining of processes surrounding the creation of $25 trillion of new mortgages issued annually across the globe, and addressing the estimated $4 billion lost through inefficiency in global collateral management within the asset leasing sector.

Mariano Belinky, managing principal, Santander InnoVentures, says: "Funds alone are not enough. To move to the next phase of evolution in financial services, banks need to invite fintechs to work within our industry, even inside our own businesses."

Read the full treatise here: » Download the document now 619.2 kb (PDF File)

ASIC signals big shift in approach to P2Ps

  Recent comments made by Greg Medcraft regarding the future of lending markets signal a dramatic shift in the way government is looking at Australia’s financial system.

Medcraft, chair of the Australia Securities and Investments Commission (ASIC), called on Australian banks to get real about their lending and deposit practices, provide better returns for depositors and lower the cost of borrowing for small business. The ASIC chairman said changes to capital and liquidity rules meant capital markets will play a much larger role in funding that segment.

He cited the role of e-commerce giant, Alibaba, in funding small businesses through securitisation and stressed the speed with which the tech giants are introducing new products.

Medcraft suggested Aussie banks get cracking and rethink their future in a digital world.

ASIC joining a growing chorus

According to Daniel Foggo, chief executive of RateSetter Australia, Medcraft’s shift in view is very revealing since as little as twelve months ago 12 months ago – at the preliminary submission to the financial services inquiry – ASIC only lightly touched on the effects of digital disruption on the financial system.

“Now Medcraft is suggesting that traditional banking needs to change and the that future lies in more efficient systems like marketplace lending,” he said.

That government and regulators have seen the positive impact made by peer-to-peer lending overseas and they want Australia to catch up has enthused Foggo and his ilk.

“ASIC is essentially saying that banks shouldn’t hold a lot of debt on their balance sheets, there are better models out there, tax payers should not be bearing the risk and the consumer should be getting a better deal,” he argued.

As he sees it, the Aussie corporate regulator is joining a growing chorus of regulators globally including the Bank of England, The US Federal Reserve and the European Banking Authority in recognising the importance of promoting diversity in the financial  system.

“I think there’s growing recognition from regulators globally that putting all your eggs in the banking basket does not make sense,” he said. “We need diversity.

“There are other more efficient ways for loans to be facilitated and funded which removes some liquidity risk banks impose through having mismatched terms for assets and liabilities, all of which creates significant liquidity risk requiring regulatory oversight.”

More resilient financial system

The argument he would make is that peer-to-peer platforms directly match lenders and borrowers, the amount of funds invested equals the amount borrowed, and lenders are not able to withdraw their funds at will.

Therefore, peer-to-peer lending platforms do not suffer any liquidity risks, making for a more resilient financial system.

His thinking is that  Aussie regulators will follow the UK’s lead and be more encouraging of new and innovative businesses.

“When you have political support of  fintech and more efficient alternatives, it opens up all sort of things that can improve the financial system.”Stuart Stoyan, the chief executive of  MoneyPlace, agreed a definite change is in the wind as ASIC recognises the need to keep up with the pace of change.

In reference to what he sees as ASIC taking a cautious approach to marketplace lending, he pointed out that involved a brand new asset class.

“Innovation in risk-based pricing for borrowers is one thing,” he recently told an AB+F conference.

“But for investors, this innovation provides an asset class that was previously unavailable; unless you were a bank, you weren’t able to invest in consumer loans, mortgages or small business loans.”

MoneyPlace splits loans into smaller portions to enable investors to diversify further. Stoyan added that the regulator is most concerned that marketplace lending that doesn’t fit the existing regime as it sits on both sides of the balance sheet.

In his view, while ASIC understands most local peer-to-peer lenders have a great deal of  financial services experience, once up-and-running the worry is that they will attract a  fringe element – outfits that setup and then disappear overnight.

“Regulation is fine,” he said. “What is not fine is regulation that protects an outdated business model and doesn’t keep up with the pace of innovation.”


Tags:ASICpeer-to-peerP2PlendingregulationGreg MedcraftRateSetterMoneyPlace

Author:Elizabeth Fry,

Article Posted:June 05, 2015

Unbundling of finance

Techcrunch In a world where everything is being unbundled, allowing consumers to pick and choose from things like television shows and college courses, financial services are becoming à la carte, as well. People, particularly millennials, are moving away from single monolithic banking institutions serving the majority of their financial needs to hand picking the specialized services that work for them.

According to a recent survey of 2,450 American and Canadian millennials, 46 percent say they don’t plan to stay with their current financial services company, and 67 percent indicate they are open to using non-financial services brands.

Breaking Down the Big Bank

In the past, customers had to turn to a big bank like Chase, Wells Fargo or Bank of America to provide top-to-bottom financial services — checking accounts, home loans, insurance and wealth management. However, fintech startups like SimpleVenmo and Robinhoodare allowing people to take control of every individualized aspect of their finances.

Beyond giving consumers control and options, many of these services are removing the friction of engaging in financial transactions and lowering the barriers to entry. It’s now as simple as a few taps on a mobile device to pay bills, transfer money and manage investments.

Unbundling Your Personal Finances

A smorgasbord of fintech options means that you don’t have to put the entirety of your personal finances in the hands of one company.


Services like Simple and Moven aim to eliminate banks altogether by providing banking without any fees. Your account comes complete with a debit card that works at thousands of participating ATMs, budgeting tools and money-transferring capability. More of a draw for millennials who prefer mobile banking, these services still lack more complex banking capabilities, which have made them less popular than standard banks.

Simple had just 100,000 users when it was acquired by BBVA, a big bank based in Madrid, for $117 million. However, newcomers like BankMobile hope to specifically target millennials with their suite of mobile-friendly features.

What’s being disrupted: checking accounts, savings accounts and checks.

Money Transfer

VenmoPayPalGoogle Wallet and Snapcash are just a few of the services that allow consumers to pay for goods and services or transfer money to friends and family. PayPal currently has approximately 165 million active customer accounts while mobile payments, like those provided by PayPal’s subsidiary Venmo, are projected to hit $90 billion by the end of 2017.

What’s being disrupted: ATM cards, cash and checks.

Wealth Management

Take control of diversifying your portfolio rather than putting your cash in the hands of an investor. AcornsBettermentWealthfront and Robinhood allow you to invest your money where you want it with free stock trades, portfolio management tools and automated investing based on your goals.

These so-called “robo-advisors” have become so popular, particularly among millennials, that large banks have been buying in as well. For example, Citi Ventures and Northwestern Mutual both have invested in Betterment.

What’s being disrupted: large investment corporations like Fidelity and Vanguard.

Unbundling Your Business’s Finances

Receiving Payments

Credit card companies sometimes charge astronomical fees in order for businesses to accept them. In 2005, a class-action lawsuit found that big credit card companies like Visa and MasterCard were even working together to set higher swipe fees.

Square and Braintree are some services that allow small businesses to seamlessly accept payments — via credit card, bank transfer and even bitcoin — with significantly lower fees and less red tape.

What’s being disrupted: credit card companies.

Business Loans

Anyone who has tried to get a loan for his or her small business knows what a nightmare it is. Services like CAN Capital and Kabbage provide business loans and merchant cash advances for small businesses while companies like Fundera match you with lenders that offer the most competitive rates for your needs.

What’s being disrupted: big banks with restrictive loan approval policies.


Small businesses that can’t afford a dedicated accounting team can still ensure their employees and freelancers are getting paid on time and manage their benefits with affordable services like ZenefitsWave and ZenPayroll.

What’s being disrupted: accounts payable departments.

Looking to the future

Fintech is finally coming of age, with global venture capital investment in fintech companies reaching over $2.8 billion in 2014, up significantly from $1.8 billion in 2013. This investment reflects a genuine desire for innovation from consumers that help them take control of their finances through technology.

As millennials mature, they will demand personal control and transparency of their financial interactions. From banking to insurance, any organization that doesn’t promote this new paradigm will likely not be around for the generations to follow.



ASIC to act over 'fleecing' by financial services firms

MAY 28, 2015 12:00AM
Economics Correspondent

Financial services firms face a regulatory crackdown unless they take active steps to fix their deficient internal cultures and stamp out pervasive fraud and malfeasance, the Australian Securities & Investments Commission has warned.

Laying down the gauntlet at a finance conference in Sydney yesterday, ASIC commissioner Greg Tanzer signalled the corporate regulator was fed up with the “fleecing” of ordinary investors and wanted to see business leaders promote integrity among more junior staff.

“It is unquestionable we need a fundamental shift in the culture of the financial industry ... now,” he said, reeling off the growing list corporate wrong­doing among financial services companies, here and abroad, since the global financial crisis in 2008.

“Trust and confidence have significantly been eroded over the past few years due to poor conduct within the financial ­industry.”

Mr Tanzer’s remarks follow ASIC’s investigations into a number of Australian banks including UBS, Commonwealth Bank and Macquarie Bank, variously for misselling of financial products or governance problems.

They also come a week after US and British regulators slapped $7.6 billion of fines on six global investment banks, bringing the cost of poor conduct for the 10 most affected global banks to more than $US240bn since 2008.

“ASIC is concerned about culture because it is a key driver of conduct within the financial industry. Bad conduct flourishes, proliferates and may even be rewarded in a bad culture,” Mr Tanzer said.

He revealed ASIC had sent “targeted questionnaires” to investment banks to gauge their “appetite, attitude and approach to conduct” and was in the process of a “roadshow” through the investment banking community to inculcate the importance of good conduct.

“It is going to be challenging and significant time will be required to change culture and embed new attitudes,” he said.

The commissioner said studies showed good conduct, such as putting customers’ long-term interests first and having a remuneration structure that encouraged “doing the right thing”, was also in firms’ long-run benefit.

Separately, Reserve Bank deputy governor Philip Lowe flagged potential regulatory changes in the rapidly growing funds management industry to make roles and responsibilities clearer in a time of financial crisis.

“Many of these vehicles allow investors to redeem their funds at short notice, even though the underlying assets are not particularly liquid, and are likely to be even less liquid at a time when there are large-scale redemptions,” he said, noting the value of industry assets had surged from 40 per cent of GDP in the early 1990s to around 125 per cent today.

At the same Thomson Reuters conference, Dr Lowe suggested not enough investors might understand that the perception of liquidity can be misleading in times of a crisis, when the underlying assets become illiquid.

“This needs to be clearly understood by both investors and fund managers. This has not always been the case,” he said.

He also said Australian banks’ mortgage portfolios had become riskier in recent years. “Household debt is high, property prices are very high, income growth has slowed and the unemployment rate has drifted up,” he said.

P2P Lending: Why You Need a New Uncorrelated Asset Class

by Simon Cunningham on  in Editorials



The goal of investing is to earn a return, and for most, this return is about saving for retirement. This means most Americans have a time frame for their investment that is decades long, but it also means they have very little freedom to lose much money.

As a result, the nation’s favorite investment is stocks, and for good reason: the stock market has returned investors an average of 9% per year for 87 years! Great returns and consistent performance. Obviously, the past is no guarantee for how things will happen again, but dramatic changes would need to occur in our nation for nine decades of consistency to upend.


As a result, I myself am solidly in the stocks-for-growth camp as well. When looking at the data, it’s hard to find a better investment to grow excess cash.

However, this is where things can often become too simple. Many people start to trust the broad stock market so much that they underdiversify their life savings into it. “Dump it in the S&P500,” people say. “Put it all in VTI (Vanguard’s Total Stock Market ETF) and forget about it.”

There’s some logic behind this truism. Funds like the S&P500 and VTI are a decent yardstick of the entire US economy, with both the nation and the total stock market growing by leaps and bounds over time. But if someone’s entire life savings is placed solely in this one asset, investors are not truly diversified and are actually taking on a lot of needless risk.

Were the 2000s Really a Lost Decade?

A great example of this is the performance of stocks in the 2000s. Many investors call the 2000s a lost decade because the 10-year return of the overall stock market was historically dismal. Even the 1930s were better. If you had placed $10K into the S&P500 on January 1, 2000, ten years later your investment would have been worth $7500, a loss of -25%.

But investors often do not realize that the 2000s were actually great years for all sorts of other types of investments. Here is the yearly return of the S&P500 (some of the largest companies in America) versus mid-cap stocks (smaller companies worth $2-10 billion) during those same ten years:


You can see the returns move together. They have strong correlation. If one moved up or down, typically the other did as well. However, they delivered quite different results over this 10 year span. That same $10K would have grown to $16,028 if placed in a mid-cap index like MDY.


See the green line? This is what you would have earned had you diversified your $10,000 across both (rebalancing at the end of every year). Yes, with 50% in large caps during the 2000s you would have softened the healthy return of mid caps. But you would have avoided an overall negative return.

Different classes of investments move in different ways.

The point here is not to say a mid cap index is a better investment than a large cap index like the S&P500 (which is obviously not true). Neither is it to suggest a 50/50 large/mid cap portfolio is a good investment. My point is to show how different classes of investments move in different ways. Since we cannot predict which one will perform better, it’s important to diversify across a variety of them so to make our overall investment more consistent (and less stress-inducing).

What is an Asset Class?

So you can see the benefit of diversifying across multiple asset classes, or types of investments that move with some degree of independence from one another. Stocks have a variety of subclasses like large, mid, and small caps. Bonds are another asset class, as is real estate. And each of these asset classes perform somewhat independently from one another. A good year for stocks doesn’t really mean a good or bad year for bonds. Largely, each of their respective performance is uncorrelated with the other.

Here is a chart I compiled of the performance of every major asset class:


Two things stick out to me from this chart:

  • The overall jumble of the picture. There is no fail-safe way to earn a short term return!
  • Over the long term (and even including the ugliness of 2008) stocks continue to outpace almost everything else.

In my view, stocks should continue to be the main way we grow our retirement accounts. These 9% yearly returns is hard to beat. However, most investors should probably spread their cash across more than just the S&P500. By diversifying across the small and mid cap sub-classes, stock investors are likely to avoid having more lost decades in the years to come.

The Problem with Stock-Only Investing

The problem is that large and mid cap stocks are highly correlated investments. The same goes for other stocks: small caps, international stocks, and emerging markets (Read: SeekingAlpha). If one goes up, the others typically go up as well. As a result, a retirement account purely held in stocks is not as diversified and stable as it could be.

Ideally, you would invest in places outside of stocks, like in real estate and bonds. These investments are great because they give us a place to put our cash to work that is far less correlated to stock performance. If stocks tank, bonds and REITs are less likely to be affected. But they also have somewhat meager returns overall. As seen above, real estate has rewarded investors with just 3% per year since 2007. Bonds are even worse, returning just 1.2% per year.

Why You Need Peer to Peer Lending in Your Portfolio

But peer to peer lending has returned 7% on average to investors each year, and it is highly uncorrelated with stocks:


The above graphic is from a paper recently published by the investor tool LendingRobot: “How much should you invest in Marketplace Lending?”. In it, they did the math to discover how well peer to peer lending correlates with other asset classes. See the area highlighted in yellow? That is peer to peer lending’s correlation with stocks.

Peer to peer lending and stocks have very low correlation.

A correlation value of 1.0 would be a perfect correlation while a value of 0.0 is no correlation at all. So when compared to stocks, peer to peer lending has an average correlation of between 0.13 and 0.19, a very low overall correlation! It should be noted that asset class correlation does change, so it would be great to see how this value changes year by year.

In contrast to p2p lending, the four stock indices have correlations of 0.8 and 0.96 between themselves. They are very tightly correlated, so an investment with one will give somewhat similar performance to the other three. Simply spreading your cash across stock indices is not a very diversified investment.

For Growth Investors, Stocks with P2P Remains a Great Combination

As we near retirement, we need places where our cash can be kept safe. There are many low-risk investments like bonds that can care for our accrued cash, earning enough return to outpace inflation and ensuring our retirement years are focused on relationships, not financial worry.

However, most investors are looking for places to entrust cash that makes it grow. For these people, they should avoid the overly simple truism of placing their entire retirement into the S&P500, or into a total market index like VTI. Instead, investors should diversify their cash across a variety of asset classes and subclasses, giving their portfolio consistency and peace-of-mind.


One great way to get that peace of mind is by placing 20% of our overall portfolio into peer to peer loans. Not only have they historically given investors a 5-9% return per year (depending how much risk is taken on), but their performance is also highly uncorrelated with stocks and bonds. By including peer to peer loans in their overall growth-investments, stock investors are more likely to experience consistent rewarding returns each decade, ensuring an eventual retirement that can solely focus on the people they love.



Is 'P2P' Lending a thing of the past?


19th May 2015

Looking at the webpages of the three largest members of the P2PFA, an interesting observation can be made. Only two of the three platforms, Zopa and RateSetter now call themsleves peer to peer lenders. The third, Funding Circle, has opted for the moniker 'marketplace lending' to describe what it does. Is this as a result of increasing institutional volume? Can platforms that facilitate large amounts of institutional volume continue to call themselves 'P2P'? Opinion is split as to whether the increasing volume of institutional lending through Alternative Finance platforms in the UK is a good or a bad thing. P2P purists are concerned that institutional lenders may crowd out the retail investor and reduce returns. Others argue that the inclusion of institutions is a necessary step in the continued evolution of the industry into a new asset class, rapidly enabling the industry to scale in a way that retail investment could not do alone and also bringing a greater level of professionalism and scrutiny.

Here at AltFi Data we have been tracking institutional involvement at Funding Circle for some time in a series of updates. Now, with Zopa and RateSetter publishing their loanbooks, we are able to investigate institutional activity at these platforms also giving a better picture of what is happening in the overall industry.

Both the Zopa and RateSetter loanbooks indicate whether a loan is covered by the contingency fund or not. It is not currently possible to invest as a retail investor on these platforms and not be covered by the respective Safeguard or Provision funds. Therefore, if we assume that the lenders on loans not covered by these funds are institutional investors, we can look at the minimum involvement of institutions in the space (minimum because it is possible that some institutions will opt for provision fund coverage and therefore will not be picked up in this analysis).

Chart 1: Estimated aggregate institutional participation in Funding CircleZopa and RateSetter originated loans.

The picture of institutional involvement in these top three UK platforms (together representing a 55% market share) is, unsurprisingly, one of increased institutional involvement. As the aggregate chart above shows, at least 27% of the origination volume for the biggest three UK platforms last month came from institutions. Institutional involvement in the UK market is significantly lower that it is across the Pond. In the US, retail investors account for only 10-20% of volume originations with companies like Orchard seeking to facilitate ease of access and a depth of knowledge in this emerging asset class to match exploding institutional interest.

Since the listing of P2PGI in May 2014, a number of closed funds have launched in the UK (such as Victory Park Speciality Lending and Ranger) and significant amounts of institutional investor commitments have been announced. Might the amount of institutional involvement in the UK be headed a similar way to the US? Could these closed funds end up becoming the medium through which a retail investor accesses the asset class going forward?

Chart 2: Monthly Funding Circle whole loan origination.


Funding Circle’s percentage of whole loans originated has increased since they started providing them in May 2014. As can be seen from the chart above, recently the increase appears to have levelled off around 40% with a slight decrease in April, likely to be a one off ‘blip’ rather than a trend.

Chart 3: Monthly Zopa loan origination with and without Safeguard fund protection.


As can be seen from the above chart of Zopa’s Safeguarded vs non safeguarded loan origination, since June 2014 when Zopa started to once again issue loans that were not protected by their contingency fund, the proportion of non Safeguarded loans has steadily increased. The timing and scale of this increase is similar to that seen with Funding Circle’s whole loans and coincides with the listing of P2PGI earlier in May 2014.

Last month (April), Zopa set a new industry record for monthly origination volume. We can see that almost half (43.5%) of April’s origination volume was down to loans that were not protected by the Safeguard fund (ie institutionally funded).  Just today we learned of a partnership between Zopa and Metro Bank where Metro Bank will fund loans that Zopa originates, adding more fuel to the institutional engine.

Chart 4: Monthly RateSetter loan origination with and without Contingency fund protection.

RateSetter’s non-provision fund protected loan origination is in stark contrast to the trend we see emerging at Zopa. Perhaps institutions investing in RateSetter loans invest in loans covered by their provision fund. Or maybe RateSetter is a more retail lender focussed platform? From RateSetter’s Blog post last December, we can see that over 93% of lending was by individuals. This would confirm our latter theory: RateSetter is a more retail lender focussed platform.

We have seen that mounting institutional interest in the UK has been gradually translating into a greater proportion of monthly originations funded by institutional investors. The launch of several new funds and large institutional commitments in 2015 may mark the beginnings of a shift in the channels of institutional capital directed to marketplace lending platforms. It is worth noting that for all three platforms, volumes from individual lenders continue to grow, albeit not as quickly as those from institutional lenders on Funding Circle and Zopa. However there appears to be a difference of opinion between the UK's three leading platforms as to the best way to grow with Funding Circle and Zopa courting the institutional money and RateSetter seemingly concentrating its efforts on the retail investor’s money. We'll be interested to see how the picture develops over the coming months and, as ever, we'll keep our readers updated.