LendInvest, a UK peer-to-peer short term mortgage lender, just turned a profit for the second time in its two-year history.
The company, which lets investors lend directly to people looking for short-term mortgages, made a £3.1 million ($US4.7 million) profit in the year to March, up from £1.2 million ($US1.8 million) in 2014. Revenue rose from £5 million ($US7.6 million) to £15 million ($US23 million).
But LendInvest CEO Christian Faes believes the peer-to-peer lending sector in which his business operates in is overheating.
He told Business Insider: “We think there’s growing scepticism about the whole fintech space and particularly peer-to-peer about whether these businesses can ever actually be profitable.
“I think the scepticism is right. There’s a lot of businesses that have raised a lot of money over the last few years at seemingly crazy valuations and some of them don’t appear to have any prospect of making any money at least in the next 5 years.
“Understandably people in the City start to scratch their heads and wonder what the hell is going on and think it’s a bit reminiscent of the dotcom bubble. “
Peer-to-peer platforms, where savers lend money directly to businesses online at better interest rates than offered by the banks, has exploded in Britain since the financial crisis of 2008. The industry has spawned one of the UK’s few “unicorns” (private technology businesses valued at more than $US1 billion) — Funding Circle.
But Faes believes there’s too much hype in the industry and not enough proof of the model. He says: “We’re a real business that makes money, we’re not fuelled by giddy VC money to keep the lights on.”
If all this sounds like a niche concern, it’s not — the peer-to-peer market in the UK currently stands at £4.6 billion ($US7 billion) and is growing fast, according to investment bank Liberum and industry website AltiFi.
Faes isn’t the only one sounding the alarm either. I heard similarly fearful noises about the sector from Nick Harding last week. He’s the co-founder CEO of another fast-growing peer-to-peer platform, Lending Works, which lets savers lend their money to consumers.
The Financial Conduct Authority (FCA) is currently in the process of regulating all of the UK’s peer-to-peer platforms, the first time there’s been any official, tailored oversight of the sector. The deadline for licence applications to the FCA is at the end of this month.
Harding is predicting a big clear out this time next year when the new regulation hits home, as platforms either fail to make the grade or balk at the cost of getting things up to scratch. Lending Works has spent over £100,000 ($US153,500) so far just on preparing its application.
Faes agrees: “The regulatory landscape will definitely shake out the sector. I’m told there’s about 170 peer-to-peer platforms out there. The reality is as we go into a more heavy regulatory environment, it does become quite expensive and cumbersome to run a peer-to-peer lender.
“If you’re not doing much volume and you’re many, many years away from any prospect of profitability, I imagine it would be pretty demoralising.”
Both Harding and Faes are hugely bullish about peer-to-peer. They’re simply worried that the ease of entry into the market and the wealth of easy money floating about has led to a lot of chaff along with the wheat. They both worry that what happens to the lower quality platforms could damage the reputation of the entire industry.
Most of those that will go under or fold will be smaller lenders and Harding says many platforms are committed to taking on their loan books to ensure that the nascent industry’s reputation isn’t damaged. RateSetter took on the loan book of platform GraduRates at the end of last year, after it decided to close its doors in the face of FCA regulation.
Beyond the FCA regulation, Faes takes issue with the philosophy of sacrificing profit for growth pursued by many in the sector.
“We’ve shown you can be profitable and have scale,” he says. “We’re doing comparable figures to the biggest platforms in the country and yet we’re able to do a fairly respectable profit — £3.1 million we think makes us a fairly decent business.”
LendInvest has financed over £400 million ($US614 million) worth of loans since launch in 2013 and is on track to lend £300 million ($US460 million) this year. It now makes up 10% of the short-term mortgage market in the UK, where people buy houses that need work, repair them, then quickly sell them on for profit.
Faes says: “Some of the others, if you’re lending a couple of hundred million a year but you’re not making a single pound of profit it does make you scratch your head about the business model.”
Faes didn’t single out any platforms but Zopa, the consumer loans platform that pioneered peer-to-peer in the UK, made a loss of £5.3 million ($US8.1 million) last year, despite lending £265 million ($US406.8 million) over its platform in the year. Meanwhile, the UK’s third biggest platform RateSetter is profitable.
Companies like Zopa that are loss-making argue they are investing in growth. Much of this is down to pressures from venture capital investors who see this as a key metric.
LendInvest took on venture capital funding itself this year, in one of the biggest “Series A” funding rounds for a European startup. The company raised £22 million ($US34 million) from Chinese technology company Beijing Kunlun in June.
“In reality it probably changes out focus a little bit,” says Faes. “I don’t think it changes our focus on the bottom line but I think it highlights our focus on the top line. We’ve got to show we can use that money for growth which is difficult when each month we’re turning over £300,000 to £400,000 of net profit. We do want to spend a bit.”
But, he says, this doesn’t lessen his scepticism — there are plenty of platforms out there that need to prove they can make a profit.
LendIt Europe, the flagship conference for the peer-to-peer industry, takes place in London next week. It will be interesting to see how many of this year’s attendees make it to next year’s event.