As the FT points out - How all this plays out can only really be understood through the prism of a full credit cycle. What happens, for instance, when the growth imperative collides with a recession that leads to soaring loan losses? Will institutional lenders fly as they did in the crisis from traditional finance companies, such as Household and GE Capital?
The snag is that persuading lenders to retain this risk has proved rather onerous. Whereas banks pay their depositors peanuts, Funding Circle’s UK lenders have received between 4.4 and 7.2 per cent annually for their loans since 2010, after loan losses are accounted for. That shrinks the amount available to pay the platform’s shareholders for their efforts. Worse, income is not stably recurring. Most of the platforms’ revenue comes from transaction fees paid upfront when the loan is agreed. For instance, 80 per cent of Funding Circle’s income comes from this source. That makes them highly dependent on new lending. Stop the flow for any reason, and the business plunges into loss. (Which explains Prosper’s largesse with equity).