P2P Landscape in Europe: shady past and bright future

In the early days of 2015, when one of the first P2P platforms in Europe like "Mintos," "TWINO," and others started to appear, they seemed to bring new financial products to the market. The primary focus appeared to be on delivering fast and high returns for investors. It seemed that since the platforms were and still are easy to use, and a large investment is not required to start, it was believed that the first retail investors might have been youngsters of that time, those who believed in the bright future of this product. They potentially remain a loyal audience to the platform today and they may have grown their portfolios together with these companies over time.

But unfortunately, due to several factors and lack of regulation, some platforms turned out to be scams or fell victim to loan originators who listed fake loans. That caused significant losses for investors and their belief in this relatively new financial product type. To address this, since 2021 crowdfunding regulations have been introduced in Europe. However, it's important to note that P2P platforms, except for Latvia and Lithuania, where in 2021 P2P regulation and guidelines were established remain largely unregulated.

The terms P2P and crowdfunding are widely misused. Many online platforms label themselves as P2P platforms while being clear crowdfunding platform operators. The key difference between them lies in the nature of the investments offered. The P2P platforms can be mainly divided into 3 categories based on how they operate. First is direct P2P where the platform is linking together one borrower and one lender. That was the way these companies operated when they started to emerge and create this market segment. Secondly, lending groups originate loans within their own corporate group and afterward list them for refinancing on their own group-owned platform e.g. ViaSMS has its own platform and loan originators. Third is fully independent marketplaces where the significant or most of the loan originators are unrelated companies.

On the other hand, crowdfunding platforms focus on collecting funds from multiple investors to finance specific projects or ventures and finance them directly. Moreover, there are debt and equity crowdfunding platforms while under P2P only debt financing is offered. It could be that in the future that P2P platforms in Latvia could also offer products related to equity funding since the investment brokerage license opens up room for a wider range of products to be offered to investors.

Today the P2P market has established itself together with the 26 platforms across the EU, which have developed 16 unique products, where the average yield in these platforms reaches even 12%. The total volume of investment in the platforms will soon reach 20 bl EUR with an outstanding investment portfolio could be estimated at 1 bl EUR. However, the market is still small when compared to other classical investment options such as stocks and bonds as well as never asset classes such as Crypto. For example, the Bitcoin market alone is worth 292 million EUR. Furthermore, in Europe, household overnight deposits amounted to more than 5 trillion EUR which is not even comparable to the investment portfolio of the market. Moreover, these platforms are rather unpopular, of 448 million people in the European Union only less than a million have registered on these platforms.

But, in this relatively small market, several market leaders have established themselves e.g. ''Mintos'' being the largest p2p platform out there, holding almost 50% of the total investment in the market which is equal to more than 9bl EUR, and having more than half a million registered users. The second biggest platform is ''Peerberry'' from Croatia, followed by ''Twino'' (Latvia) and "ebedex" from Belgium. Together these three players have less than 3.9 billion Eur invested which is not even half of the ''Mintos'' market share. The dominance of Latvian players, as also seen on Venture Faculty and dealroom database, in general, is a prevalent trend, with even non-Latvian registered companies having connections to Latvia, such as Latvian founders or other affiliations. 

Last years brought up a lot of skepticism about the P2P platforms due to the events like Covid-19 pandemic, where default rates increased among borrowers, Russia's invasion of Ukraine that resulted in loan originators from Russia and Belarus being unable to make payments to the platforms and afterward being excluded (at some platforms loan originators from these countries accounted for more than 50% of listed loans. Lastly, the rising inflation and rising deposit rates, which now has reached nearly 5% made some skeptics think that retail investors will be less likely to invest their money in the platforms or even move them outside the platforms for less risky and guaranteed return at banks. 

However, despite the challenges, platforms and investors have coped with the shock and platforms re-orientated fast enough by onboarding new loan originators from 3rd countries to ensure high returns on investment, so the demand for P2P investment opportunities remains larger than the provided supply. Apart from this, other aspects play a crucial role in keeping demand for the P2P platforms like investing in P2P platforms still being one of the easiest ways to invest in comparison to investing in the stock market, bonds, or for example real estate, where there is either complicated process or huge initial capital required to start the investment journey. Lastly, some platforms have been obtaining Investment brokerage licenses or being regulated in different ways, as well as surviving the above-mentioned external shocks, thus showing themselves as reliable. Lastly, the generation that used to invest in P2P 10 years back is getting more wealthy with more funds to invest and they are already used to P2P investing, creating a solid demand and it can be seen, that current demand highly exceeds the supply as in many platforms there is excess of clients funds.

The industry itself is looking to become a more long-term and sustainable solution for retail investors and play a more important role within the retail investor's portfolios. To achieve that P2P platforms have been introducing various features, more long-term products, and wider diversification options. One of the first ones was offering buy-back obligations on loan originators. New, long-term products like mortgage loans and more long-term investment strategies are being offered. For example, In ‘’eksketit’’ platform you can find these products with a yield of 9%. While the most widely offered product offered by P2P platforms still remains consumer loans, which have yielded up to 12 - 20% or more in some particular platforms, some new products like mortgage loans, forward flows, and debt collections are starting to appear more frequently.

In the future, It might be expected to see green loans appearing on P2P platforms since they have gained significant traction in crowdfunding platforms. These loans finance sustainable and environmentally conscious projects. The company Hive5 is working to deliver such a product to potential investors in the future. 

It can be concluded that the peer-to-peer (P2P) lending landscape has experienced evolution and has lived through its ''wild West'' phase. But still, there is plenty of room to grow and expand since the market has excess demand. Some new players such as “Indemo” and ‘’Nectaro " will soon begin their journey in this landscape and we can expect that more companies will appear over time since there is an excess demand in the market. Furthermore, to make investing in platforms less complicated for beginners and user-friendly, platforms Some platforms such as ‘’Bondora’’ and ‘’Kviku Finance’’ have closed their manual investing options and are offering super-simplified investing strategies to attract investors with 0 previous knowledge. 

After all - it is clear that it remains one of the easiest investment opportunities and the market is yet so small, that there is an enormous place for growth, thus we can expect a long-term development of the industry in combination with different kinds of new products offered. Moreover, it will not be surprising if more players also from different segments would step in, since the market is gaining attraction in the Fintech industry. The fact that the market has not plummeted during the recent crises shows that the idea behind it is sustainable and it has its niche.

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