One epic slideshow tells you everything you need to know about the $180 billion world of online lending (2024)

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Leech starts by looking at how dominant the big platforms are and just how quickly they're growing. The eight biggest platforms in the US and UK have grown volumes by 100 times in just five years.

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Continental Europe, excluding the US, lags the US, Britain, and China, with online lending making up just 0.1% of the total market compared to 2.2% in the US...

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...but Europe is growing fast, with lending volumes accelerating by 200% this year. That's still eclipsed by China though, where volumes are on track to grow by almost 300% this year.

In the UK, the online lending market is worth $4.4 billion. Leech estimates online lending could account for 40% of small business lending by 2025 and 15% of buy-to-let lending.

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But awareness of peer-to-peer (P2P) lending in the UK, the most popular form of online lending here, is static. Only around 15% of the population would lend through P2P. That suggests growth is coming from early adopters investing more money through the platforms.

The growth potential for the European market is huge given it's so small right now — just $1.5 billion. Leech predicts Europe will overtake the UK by 2020.

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Now let's look at returns: China has the best, while Europe has the lowest yields. On a platform by platform basis, Europe's Bondora has the best average returns, while SOFI in the US has the lowest.

Given how new this industry is, how can we predict what will happen to it? Leech says peer-to-peer consumer lending is roughly comparable to credit card debt and the data on returns for this is good.

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But while the outlook is good, it's worth noting just how favourable conditions are for online lending right now — interest rates and unemployment are both low. That leads to people wanting better returns and less chance of defaults.

What happens in a crisis? Even under "fairly aggressive" stress testing, Leech says yields are likely to stay at or above zero. In other words, you're unlikely to lose money.

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Peer-to-peer lender Zopa was around during the 2008 crisis and did surprisingly well. In that year, its worst, average loan losses were 2.3% but average yield was 5.9%.

UK yields appear to be slightly higher than comparable loans in the US, but there's not much in it.

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Peer-to-peer loans are in fact performing better than credit card debt and UK bank originated personal loans.

If we then take credit card and loan data as a proxy for peer-to-peer loans, it looks like a better investment than equities and property based on historic data. Peer-to-peer loans have a more favourable Sharpe ratio, a measure for calculating risk-adjusted returns.

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Using this proxy, Leech also estimates that peer-to-peer, had it been around for the last 20 years, would have probably underperformed the S&P500, but have much lower volatility and no years of losses.

The best rate of returns are in niche lending spaces such as property bridge financing, insurance premium financing, and near prime car financing.

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The way money comes into the sector is evolving. The latest innovation is listed investment trusts for platforms like Funding Circle. Leech predicts we'll soon see cross-platform portals that let retail investors put their money onto different platforms from one website.

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Is this a flash in the pan? Leech sees the sector as sustainable for 4 reasons: credit data is improving; online lenders are more efficient at lending to small businesses than banks; the technology is getting better; and governments are supporting the sector.

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Peer-to-peer platforms are also raising a lot of money — significantly, from mainstream asset managers like BlackRock and Artemis. This shows they're beginning to get mainstream acceptance.

These companies look like good investments too. If you invested in Funding Circle in its Series A round you'd be looking at a 147% return.

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The best time to invest in a platform is just before an institutional investor comes on board. Institutions typically tend to then lend money over the platform, which drives up the value. Company valuations have an almost linear relationship to loan volumes.

Then Leech has a pitch on how Liberum can help companies and investors looking at this sector.

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Leech thinks regulation is important in helping the sector mature. He wants fee transparency and a central database to help monitor and prevent fraud. He also thinks management pay at these companies should in future be aligned with loan performance, to bring peer-to-peer players more in line with banks.

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Leech thinks marketplace lending platforms are going to get more and more important as the sector grows and products are integrated with things like mobile wallets.