The following is a guest submission from Bondora’s Jevgenijs Kazanins. Bondora is a European personal loan investment platform.
Earlier this year the Centre for Alternative Finance at University of Cambridge Judge Business School in co-operation with professional services firm E&Y, released a pan-European study of alternative finance market, which can be considered the most comprehensive study on the subject released to date.
As the subset of the alternative finance market, the researchers studied the consumer peer lending sector and reported an impressive growth of 272% over the period of 2012 to 20141. Thus, the study estimated that P2P consumer lending market in UK reached the volume of EUR 752m in 2014 with peer lenders in other European countries contributing another EUR 274.62m1.
The triple-digit growth and over EUR 1 billion in transaction volume sound impressive; however, to validate if peer-to-peer lending has “moved mainstream” (as the title of the study suggests) we need to compare the peer lending volumes with the addressable market size.
According to the European Central Bank, the outstanding balance of consumer credit, revolving loans, overdraft and credit card loans in European Union countries was at the level of EUR 1.04 trillion2 at the end of 2014. Comparing peer lending volumes with the personal loans and credit card overdrafts makes sense, as those are the key areas that peer lenders are attacking.
As the data highlights, the total consumer peer lending volume in 2014, or the estimated EUR 1 billion of issued loans, represents less than 0.1% of the opportunity that peer lenders are pursuing. Even when compared only to the convenience and extended credit card loans outstanding balance, which is the smallest segment of all three in our comparison dataset, peer lending volumes amount to just 2% of the market potential!
The study continues with highlighting several markets that stand out on the European landscape. In particular it highlights the United Kingdom, which is considered to be the most advanced peer landing market in Europe.
According to the European Central Bank, the outstanding balance of consumer credit in the United Kingdom at the end of 2014 exceeded EUR 150 billion2. Thus, the combined volume of consumer peer lending in the UK amounts to just 0.5% of the market potential. It is a marginal contribution, which can hardly be called mainstream just yet; however, the growth pattern is impressive. Thus, consumer peer lending volume represented just 0.12% in 2012.
Similar analysis on Germany reveals a total market potential, estimated using the outstanding balance of credit for consumption, revolving credit, overdraft and credit card loans, of EUR 216 billion2 and the consumer peer lending volume of EUR 80.4 (in 2014) representing only 0.037% of it. As one can see, if German peer lenders could catch up with their UK peers in terms of the relative volume to the market potential, it would represent a EUR 1.08 billion in annual volume rather than a mere EUR 80.4 million.
Comparable situation and potential for consumer peer lending growth can be observed in France. Thus, the country exhibits a market potential of EUR 189 billion2, estimated using the outstanding balance of credit for consumption, revolving credit, overdraft and credit card loans, and the consumer per lending volume of EUR 80 million amount to just 0.042% of it. In case of France, catching up with the UK peers would drive the volume of consumer peer lending to EUR 947 billion annually.
The drastic differences in the peer lending landscapes between the United Kingdom, Germany and France, can be sought after in a) the regulatory environment, and b) competitiveness level of traditional lenders.
For instance, while UK regulators are considered to be open to peer lenders, Cambridge University study reveals that 58% of the surveyed peer lenders in Germany claimed that the regulation is excessive and too strict, while only 13% of the surveyed players claimed that the regulation is adequate.
Operating as a peer lender in Germany, can be harder from the regulatory perspective, which might hinder the growth of the sector. However, the levels of prime interest rates for revolving loans, overdraft and credit card loans in Germany are similar to the interest rates in the United Kingdom3. The similarity in the interest rates, suggest that German peer lenders should be able to compete with the traditional lenders and achieve the same level of success, at least in the credit card refinancing segment (which to remind, stood at the level of EUR 259 billion at the end of 2014).
Analysis of the peer lending potential from the perspective of competitive interest rates offered by the traditional lenders hints towards high potential in such EU countries, as Spain, Portugal, Slovakia and Estonia3. As the chart below suggest the average interest rates in those countries, as reported by European Central Bank, are considerably higher that in the United Kingdom.
An although economies of Spain, Portugal, Slovakia and Estonia are smaller than of the UK, Germany or France, those market still have the outstanding balance consumer, revolving credit, overdraft and credit card loans of approximately EUR 105 billion2and with the exception of Estonia have very limited presence of peer lenders.
The above, although not attempting to be a complete analysis, highlights just how massive is the opportunity for peer lending in Europe and how long is still the road for peer lending to become mainstream. Even the UK, the largest peer lending market in Europe, the volume are still marginal compared to the traditional lenders, and the gap in other European economies represent even bigger opportunities.