Few ever imagined that the social and economic status quo would be severely impacted with the onset of Covid-19. What initially looked like an isolated outbreak in China soon became a global concern.
After Italy took a heavy knock, virtually all countries around the world implemented lockdowns and other related emergency measures to try and contain the spread of the virus.
With 2020 drawing to a close, one would need to evaluate the impact this had on P2P lending and try to see what 2021 holds in store for any investor. Despite the impediments, it is important to look at how this perhaps gave the industry good insight for any possible future disruptions.
P2P Lending in Europe as the Pandemic Began
In short, P2P lending in Europe was still growing and reaching new highs during this time, albeit with some negative impacts. This is simply because lenders and investors were increasingly reliant on more flexible and rewarding financial instruments that are not available in the traditional banking industry.
According to SMEweb, the impact of the Covid-19 pandemic definitely altered the operations of all P2P lending platforms. Some reacted to the volatility by halting operations in an effort to create stability.
They also reported that there was a “run on the bank” type of panic in March 2020 and this also led to many platforms tightening their measures to try and counter the panic that was starting to settle in as most of the world started to lock down.
The impact was felt differently depending on the industry in which it was operating. Rental properties performed differently to business loans for example. Real estate seemed to maintain loan-to-value ratios that were far more stable than other sectors.
Major Disruptions for P2P Lending in Europe during 2020
The first thing to keep in mind is that P2P lending isn’t immune to global economic trends. As a financial sector, it too can be negatively affected during contractions. From a European point of view, this was a reality in 2020 with the global lockdowns that halted almost all economic activity for a time.
There is a provider-specific evaluation that Nextfin did to see how various P2P lending platforms responded to the uncertainty and economic impact of world-wide lockdowns and recessions had on their businesses. One of the things that became evident was the rationalization of platforms’ lending books by limiting exposure to high-risk sectors or clients. Mitigations were implemented to try and stave off bad debts. This included measures like:
- Tightening of credit risk parameters
- Enhancement of risk monitoring
- Strengthening of collections and recovery capability
- Minimizing avoidable credit losses
- Continuing to build resilient portfolios
European P2P Lending in 2021 and Beyond
Overall Estimates of the Industry
If carefully evaluating all the past and present trends, it could easily be assumed that the European P2P lending industry will continue to grow simply because it has proven to be more resilient during times of contraction or disruption. It is also far less regulated than traditional banks.
This argument is further supported by Paul Shumsky from Finextra where he postulates that “Traditional financial services companies are hamstrung by the fact that their systems are generally built on legacy technology that is difficult to adjust and evolve and expensive to replace.”
He further explains that P2P lenders have incorporated Artificial Intelligence (AI), Blockchain, and other Crypto Currency innovations. This not only promotes security, but it enables the industry to respond better with less human error miscalculating trends or situations that require quick responses.
Much of Asia has also seen a somewhat return to normal trading and this will have a trickle-down effect on the rest of the global economy.
Short to Medium Growth Outlook
Overall, IndustryARC did an extensive study that predicts that the P2P lending industry in the UK will grow by 23 percent by 2025. The UK is by far Europe’s current driver in P2P lending and creates a good foundation to speculate for the rest of the continent.
In the short term, P2P Finance News in the UK has indicated that current estimates are assuming that the European P2P market will fully recover by the end of 2021. They further report that the recovery will be gradual and cautious.
Rainer Lenz still argues though that online trading platforms like P2P lending in Europe “will eventually prevail as an economically superior form of organization compared to the traditional banking business model.” This is all because of its ability to respond better to change.
Impact of the Vaccine on Economic Outlook
According to Elizabeth Anderson from P2P Finance News in the UK, the initial outlook seems to bolster a positive outlook when looking at the impact of a Covid-19 vaccine being rolled out. The overall feeling is that the presence of a vaccine is seen as a cautiously optimistic move in the right direction.
Simply put, this will lead to less lockdowns and other travel restrictions that have impeded the global economy from growing at all in 2020. This will allow P2P lending to step in and fulfil any capital requirements that cannot be met with traditional banking instruments.