NEW YORK--(BUSINESS WIRE)--The long-term success of the rapidly growing peer-to-peer (P2P) industry will depend on the relative credit performance of P2P loans over time and through a full economic and interest rate cycle, according to a Fitch Ratings report published today. The report examines P2P industry dynamics and outlines Fitch's analytical considerations for rating P2P lenders.
The P2P industry exhibits substantial global growth potential, supported in part by low interest rates, a benign credit environment, evolving regulatory dynamics and robust institutional investor support. Funding Circle, Lending Club, Prosper, RateSetter, and Zopa, are among the largest global P2P lenders, which combined had nearly $3.5 billion of loans outstanding as of the end of 2013, up from just $1.2 billion at the end of 2012.
The vast majority of P2P loans in the US have been made to prime and near prime borrowers, which Fitch believes could result in credit performance that meets lenders' expectations over time. This strategy may also alleviate investor concerns related to each P2P lender's limited operating history.
Despite substantial growth, the P2P model faces significant competitive forces and shifting markets. To date, most consumer P2P loans have been originated for debt consolidation purposes. In a rising interest rate environment, loan demand could come under pressure as the benefits of refinancing decline and loan funding risks becoming constrained. To mitigate their risks, Fitch believes P2P lenders will likely pursue opportunities to expand into new markets and/or lending segments.
P2P lenders, as opposed to traditional banks, primarily act as intermediaries that collect fees from brokering loans between borrowers and lenders. The companies tend to be lightly capitalized and are exposed to high regulatory scrutiny. Fitch views the elevated regulatory, legislative and litigation risks, as well as the lack of prudential regulation (no minimum capital requirements) of P2P lenders as constraints that limit potential P2P ratings to below investment grade.
Fitch believes that banks could increasingly feel disruptive pressures from P2P lenders over time. In response to such threats, some banks have formed strategic referral partnerships with P2P firms where smaller loan sizes and/or non-qualifying borrowers can be referred to P2P lenders, and in turn, borrowers needing more traditional banking services can be directed to a partnering bank. Fitch believes partnerships could increase over time due in part to increased regulatory constraints on banks' activities.
In its report 'Peer-to-Peer Lending: A Global Industry Overview', Fitch discusses the overall P2P industry and factors that would constrain P2P lender ratings, such as their limited operating histories, lack of diverse funding sources, concentrated revenue streams, and elevated regulatory risk. The full report is available at 'www.fitchratings.com.'
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research: Peer to Peer Lending (Global Industry Overview)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753013
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