In this article, we take a longer-term and broader view of the market, looking at three of the most exciting trends that have shaped the digital lending space over the past decade. We focus on marketplace lending in continental Europe, where our data is most representative (i.e., we exclude non-European and non-marketplace lending platforms in this report).
Investment volumes strongly rebound after the Covid turmoil.
Covid has been undoubtedly the biggest test in the sector’s short history – fundings in Europe dropped substantially following the first lockdowns and strain on households’ and businesses’ budgets. Several platforms started having liquidity problems and difficulties honouring their obligations towards investors, suddenly facing a “run” on lenders’ accounts. In 2020, the market contracted by about 23% compared to 2019, mostly because of a huge slump in funding volumes between February and April.
Nonetheless, after this temporary crisis, marketplace lending has aced the test, generally speaking. Few platforms went bust, and many of those troubled providers worked on shock-proofing their business models. Investors’ confidence remained strong, and funding volumes started picking up already in the second half of 2020. In 2021, they fully rebounded, growing 37% year-to-year.
Looking further back, the volumes of European platforms that report data to us increased from €3.6 million in 2012 to €5.7 billion in 2021. The sector was picking up slowly in the first few years, only to boom immensely from about 2016 until the Covid outbreak.
According to our estimates, the sector has grown on average at a 110% CAGR (Compound Annual Growth Rate) between 2012 and 2021. However, we should point out that this might be an overestimation due to extremely low base values in the early days of marketplace lending. In the last five years (2017-2021), the sector grew at “only” 38% – more in line with estimates of other research centres.
The market has expanded and matured.
New platforms have been entering the market at an astonishing pace. Out of the 187 European marketplace lending platforms in our database, only 31 existed back in 2012. However, there are at least two caveats to it:
- The market is saturating and maturing. Most of the currently competing platforms launched in 2014-2016 (just before the massive boom in funding volumes). In recent years, though, fewer and fewer new platforms are entering the market, and several big players have established a strong position in their respective market segments.
- The proliferation of new platforms does not mean more providers of the same service. When the first platform – Zopa, launched in 2005, it offered exclusively consumer loans based on a “traditional” P2P lending model. Since then, marketplace lending platforms have expanded their product offerings, from student loans to litigation financing to even funding shipbuilding ventures. Platforms have experimented with their business models, such as aggregating loan offerings from brokers (resale lending) or originating loans themselves (balance sheet lending).
Business and property lending are gaining ground.
Highly specialised niche platforms aside, business and property lending have become mainstream investment classes, challenging the historical dominance of consumer finance in marketplace lending. Even though consumer lending remains the leading sub-sector with almost two-thirds of the total funding volume in continental Europe, its share has decreased significantly over the years (from 94% in 2012 to 64% in 2021).
Regulation is becoming a key issue.
The sector is headed towards more transparency, scrutiny, and, inevitably, regulation. As marketplace lending expands, it becomes an essential chain in the financial system. Recent development in the UK (a historically more advanced market than continental Europe) proves the point. Platforms played a role in distributing Covid support funds, while the biggest and largest operators (including the pioneering Zopa) moved to become fully regulated banks. Changes in the EU regulations that reinforce the position of business marketplace lenders are being carved out too with the referral scheme proposal and the recent passing of the Regulation on European Crowdfunding Service Providers (ECSP).
Although we do not track the changes of licence take-up over time in our data, we do see an increasing number of platforms applying for licences. As of January 2022, 63% of European platforms were regulated. Dedicated crowdfunding licences are granted, for instance, in Belgium (Alternative Financing Platform), France (Crowdfunding Intermediary or Crowdfunding Advisor), Lithuania (Peer-to-Peer Lending Platform), Portugal (Collaborative Loan Financing Firm), and Spain (Crowdfunding Platform). In the absence of specific alternative finance regulation, platforms also use alternative licences such as credit institution, payment provider, or investment firm. FInally, Switzerland is an interesting case – Swiss platforms tend to “self-regulate” by voluntarily associating in organisations that set and enforce standards of operation.
What's next for marketplace lending in Europe
How will the sector fare after the speedy recovery we saw in 2021? On the one hand, we could expect a slowdown, or at least a moderation in terms of market growth if we are right in saying that the sector is maturing. But several strong positive drivers can keep the market high:
- It is still a young, innovative, and dynamic market, so we might still see big disruptions that speed up growth.
- Marketplace lending is gaining ground as a “mainstream” investment class, with a high and growing degree of trust from institutional and retail investors alike. Passing the “Covid test” might encourage even more people to give it a go.
- Interest rates remain historically low while inflation is becoming a major worry for investors. Most marketplace lending platforms offer competitive returns compared to traditional asset classes, which might win some yield-hungry investors.
- The new EU regulation can increase clarity and boost cross-border investments – a significant bottleneck for European marketplace lending so far.
We will keep tracking the market performance and key developments in the broader alternative finance market and the progress and effects of crowdfunding regulation. Stay tuned and look out for our monthly reports for regular updates on the state of the market.