P2P lending: LendInvest closes to the mass market investor ... is it possible to service this segment profitably?
LendInvest has been the standout P2P lending platform when it comes to profitability. In only its 3rd year of operation (FY15/16*), it chalked up a £2m NET profit. The vast majority of platforms recorded losses, some of them big losses.
This week LendInvest announced that it is closing its platform to 'mass market' investors. It will concentrate on attracting lending capital from institutional and high net worth retail investors**. Is this further evidence that in current market conditions it is near impossible to service the mass market retail investor profitably?
In our recent research report SCALE ≠ SILVER BULLET, Canbry highlighted how big the task will be for mass market P2P lenders to move from losses to profits. It is significant for the larger platforms such as Funding Circle, Zopa and RateSetter and probably even more so for the smaller platforms. We suggested that it is likely that platforms would need to cut returns to investors in order to achieve adequate levels of profitability. Relying on unit cost reductions through scale benefits as platforms grow would probably not have a big enough impact on the bottom line.
LendInvest operates in a totally different loan segment to the big 3 mass market lenders (higher value property loans versus lower value personal or SME loans) but was very much a direct competitor in targeting the mass market retail investor. In its 15/16 financial year, it sourced around 1/3 of its lending capital*** from platform retail investors. It also previously had a very low minimum investment level of £100.
LendInvest has now dropped the strategy of targeting the mass market retail investor as a source of lending capital, This could be a tacit admission that it is near impossible to make money in this market segment given that LendInvest has placed as much emphasis on profitability as on growth. In the 2016 annual report, CFO Derek Mochan was quoted "We intend to continue growing like a tech company, but deliver credible, profitable results like a real finance company."
This move away from the mass market investor has also probably been influenced by competition hotting up in the segment. More competition is likely to increase the cost of acquiring new investors and dampen the ability to increase fees or reduce returns to investors. Competition does not only come from direct competitors. There are now around 60-70 P2P lenders competing for mass market money but banks need to defend their share of savers' deposits and other players such as robo-investors/advisors are also competing for the same pot.
For more detailed analysis on the prospects for profitability in P2P lending, see our previous blog post here and access our full research report here. To discuss this research in more detail or enquire about arranging a presentation or bespoke project for your organisation, contact us here.
The views expressed in this article are those of the author at the date of publication. The contents of this article are not intended as investment advice and will not be updated after publication unless otherwise stated.
* year ended 31 March 2016 - 16/17 financial results not available at date of publication
*** LendInvest 2016 annual report