Judge P2P firms on whether they’re profitable – not just on how much money they’ve lent

Christian Faes
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London Stock Exchange’s High Growth Segment tackled a key issue affecting UK tech companies (Source: Getty)
Three years ago this week, the veteran venture capitalist Robin Klein made the case in these pages for greater support for UK high growth technology companies in their push into mainstream London capital markets. Over time, confidence grew and several good firms were helped onto the public markets through the London Stock Exchange’s High Growth Segment.
The High Growth Segment tackled a key issue affecting these companies: analysts struggled to classify this new breed of businesses that broke traditional market categories. Take Asos or Just Eat: were they pioneering tech firms or revolutionary retailers? And Betfair before them: a transformational technology play or a forward-thinking gaming company? Swathes of seemingly unclassifiable, tech-driven companies have since gone public, with Worldpay setting new standards last week.
Yet the problem persists for the next generation of fast-growing tech companies focused on transforming how we borrow and invest our money. Peer-to-peer lending is a sub-sector of the burgeoning fintech sector, but it is proving hard to categorise by wider markets. Are we lenders? Are we technology businesses? And what exactly is an online marketplace? As a result, the metrics used to measure us have become skewed.
The most common question I am asked about our business is how much we have lent. It’s a lot less common for someone to ask if we’re profitable. It seems that, if you’re a fintech business, everyone just assumes (wrongly in the case of our company) that you wouldn’t be making a profit.
You only have to look at how P2P is described: “a £4bn sector”. It’s a fantastic number that shows the achievements of the pioneers in this industry, dating back to Zopa which invented the whole concept just over 10 years ago. But is total platform volume of money lent the most effective measure of our value to the UK financial services sector?
The tendency of measuring P2P on easily identifiable metrics, like volume, instead of using the same valuation and growth metrics as the businesses that have come before us, is concerning. It points towards a lack of understanding of P2P business models’ capacity to create long-term value for their investors; or more worryingly, it may warn us that important stakeholders haven’t yet accepted that P2P is a credible asset class worthy of sensible measurement.
Rumours of a shakeout in our sector have spread in recent weeks. Upcoming regulation is welcome and will further legitimise our industry’s position. But the associated costs of regulation make the wind-down of capital-poor, loss-making platforms that burn through cash more likely if not inevitable. As platforms fail, it will throw fuel on the sceptics’ fire. We must counter this upfront with effective demonstrations that well-run, well-regulated P2P businesses can be financially viable and profitable.
Buzzwords like “fintech” have been powerful tools to win attention for our sector as a challenger to traditional financial services. Yet in certain pockets of the City, they can still be met with rolling eyes and be seen as standing for “untested” or “unproven” rather than for true innovation and change.
As our sector matures and moves into the mainstream, for P2P to achieve the scale it needs, it must diversify its investor base. This means attracting greater institutional investment. If the City doesn’t understand our business models, we will struggle to truly get the support of its institutional base.
Today, Europe’s largest ever gathering of online lenders, investors and opinion formers begins at the LendIt conference. Let’s hope that there can be more talk about P2P businesses looking to become profitable and financially viable, rather than about headline lending volumes. Let’s open our doors and encourage the City to look under the bonnet. Let’s talk about ourselves the way we want the City to talk about us: companies in business for the long term and delivering value for shareholders, and show that it’s not such a fad after all.

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