The Full English Accompaniment – The rise and rise of P2P lending

What’s piqued my interest this week?

P2P leaves me puzzled. I understand the premise, I understand the attraction, but where does it fit in a balanced portfolio? Some of my fellow UK finance bloggers have dipped toes in the P2P waters; Monevator, Weenie and the other TFS to name a few (1, 2, 3). For many, including new reader the Obvious Investor, it appears to be separate from the rest of their portfolio, held as an independent entity or in an oddments corner (4). P2P has come a long way since the launch of the first platform, Zopa, in 2005, with 40+ platforms catering to different appetites (5, 6). As it comes of age and into the mainstream how do you classify P2P as an asset class in a mature portfolio? Here’s my amateur synthesis.


The appeal of P2P appears to be yield, projected at anywhere from 4-10% depending on the platform (6). This complies with the equity risk premium theory, and I’d be interested to find out if research supports this. P2P rose in popularity out of the 2008 recession. Banks clamped down on high risk lending, so those with poor credit histories or weak financial positions had to look elsewhere. P2P was safer for all concerned than loan sharks/ payday lenders. Savers chasing returns followed the risk premium to P2P seeking better rates than the crappy 1% offered by bonds and cash ISAs (7). P2P sits in the ‘Return Engine’.

Inflation Risk

This is primarily the reason for investing in P2P. With inflation running at 2.7% your money is actively being eroded in a Cash ISA. Currently the RateSetter offer will give you 14% for the first year. The 4% thereafter may not look so rosy if inflation jumps to 5% and standard bank interest rates track.

Default Risk 

This is primarily where P2P makes it’s returns over traditional bank loans. The theory argues that the platforms cut out the banks as middle-men and allow savers to loan out their cash to borrowers semi-directly. To attract savers you need decent returns, which means decent interest rates, which means the interest rates for the borrowers are necessarily high. Why would you choose those interest rates? From my laymans point of view there appear three reasons for a business to choose to borrow P2P:

  1. The act of borrowing P2P acts as proxy advertising as you have to attract funders from a pool of individuals who are by definition tech-savvy, cash-rich early adopters. They may well be your target market who are interested in your product.
  2. Your business pitch is disruptive, esoteric or quirky, and therefore relies upon a funding source which capture and project the emotive or story-driven level ignored by banks and other lenders. This is something lost with the move to centralised banks, and away from your friendly local bank manager.
  3. Your personal or business financial history is absent or poor, precluding larger or traditional funding sources.

Point 1 seems a fair trade off for certain industries. Point 2 and 3 seem classical default risk. Your story may be good, your disruptive idea genius, but if your number don’t stack up well… *whomp whomp*. Banks lending criteria became tighter because the numbers tell the score, and the casual lending of the early 00s led to a financial crisis. Plus they were straight up told to by governments. P2P fills the lending pool where banks daren’t or are legislated not to go. I should point out that the counterargument from P2P lenders is that rogue and risky lending continues to occur across all debt instrument markets (8).

Liquidity Risk

Another classic, but appears to depend on the lending platform. Some platforms (Abundance, House Crowd) allow you to pick who you lend to, others select a time period (RateSetter, Zopa) and pool your investment with other (9, 10, 11, 12). Of the options I’d prefer pooled investments as it decreases the above default risk, and diversification is always better. A few platforms offer in house secondary markets for resale if you decide to cash out. Where that’s not possible your P2P investment is tied up either for the time period, or until the project/ business is completed, or can be returned for a fee (13). Both the liquidity risk and the default risk have me making comparisons between P2P and junk bonds. These comparisons are made elsewhere as well, so perhaps P2P is a bit more palatable, or smartly wrapped (14)?


Speaking of wrappers, the attention of governments is an indication of just how far we’ve come. First IFAs were able to recommend P2P lending options, and then in April 2016 the Innovative Finance ISA was born (6, 15, 16). These operate in parallel to traditional Cash and S&S ISAs, offering a tax-free wrapper for your investments. They have their own pitfalls and complications I won’t go into here.

Legislation is a work-in-progress for P2P, but already as companies have grown they have begun to expand. This month Zopa has been granted a banking license by the FSCS, and declared it’s intention to open a traditional savings arm as a challenger bank which will be protected by the FSCS guarantee (17, 18). The FSCS guarantee won’t cover Zopa’s P2P lending.

No P2P lending/ platform is covered by the FSCS guarantee.

All invested money is at risk.

Returns are not guaranteed. There are plenty of stories in the news of people losing out where their loans default (19). The lines blur with junk bonds further. After all, you can invest directly, P2P, in small companies by buying bonds/ shares/ investments. Monzo recently ran a round of crowdfunding (20, 21)Brewdog continues to run it’s Equity for Punks V, with an eye-watering valuation (22). Those investments would also sit in a little ‘oddments’ pile of your portfolio.

Counterparty Risk

Here’s the nub of my concerns. As we look at the coming bear markets, the rogue wave in our recent trade winds, how will P2P fare. The last week has been the worst since 2008, when Zopa etc were in their infancy (23). Those times place stresses on weak companies, which fold, and default. How will P2P platforms fare? Performances and default rates are entirely based upon the platform (24). Zopa expected a 4.52% default rate in 2017, the last time it approached that was 2008 (4.2%) (15). Some platforms have provision funds to protect savers (5, 13, 15). This hasn’t stopped black holes appearing in the ledger books of lenders such as Ratesetter, forced to buy out the debts of bad investments (25). Some are bullish in their outlook, seeking further institutional investment to expand (26, 27). It remains to be seen how many P2P platforms will succumb to bad loans.


These are merely an amateur’s thoughts and ramblings on P2P. YFG has also done an analysis from a more professional point of view (28). As always, do your own research.

Have a great Christmas,

The Shrink

Side Orders

Other News

Opinion/ blogs:

The kitchen garden:

What I’m reading:

Fools and Mortals – Bernard Cornwell – finished this – good but not Sharpe or Uhtred

Rivers of London – Ben Aaronovitch – the new bedside fiction

Smarter Investing 3rd edn – Tim Hale – very close to finishing this

Enchiridion by Epictetus – Bedside reading for a bad day



2 thoughts on “The Full English Accompaniment – The rise and rise of P2P lending

  1. I have been imvolved in p2p lending since about 2006 and think that the returns (irr 10%) have been good but my risk approach has been cavalier and i have made some very good and veey bad decisions.
    Now i still have about 8% of my assets in p2P (15% of my FIRE funds) and they are doijg me well.

    overall, the return on investment is acceptable (if it does make your tax return more complicated) but the return on time invested means it is less a business and more of a profitable hobby since you may be spending a few hours a month managing your investment and on due diligence per platform. If you add up the hours thats maybe 50 hours a year per platform and assuming a 5% return; you’d need to have £8,000 invested just to scrape the minimum wage (before taxes!)

    You might want to invest and forget but its just not that simple.

    I now have 80% of my money in Abundance as I like the ethos and investments.
    The other 20% is in ratrsetter, zopa and a few bad debts – with the joy of loss relief to keep me trapped in the p2p game for a few more years yet!

    Honestly, it.would have been better if i had never have discovered p2p.

    Liked by 4 people

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