At lunch with the CEOs of two alternative finance providers last week, conversation naturally turned to one of the most intriguing unknowns in the peer-to-peer world – how exactly is the nation’s favourite retail investment platform, Hargreaves Lansdown, planning to enter the P2P lending market and what will happen if and when it does?

 

There’s no doubt that the FTSE-100 listed HL (market capitalisation £5.5bn) is planning an assault. It said as much in its most recent results announcement in early February and as if to confirm its intentions, one of my lunch companions remarked that it had just tried (unsuccessfully) to poach one of his key staff. So P2P platforms have been put on notice: large-scale and well-funded competition is on the way.

 

The presentation that HL’s chief executive, Ian Gorham, gave to analysts in early February, which you can download from the investor relations section of its website, makes clear that in order to open a new avenue for growth, the company is planning a major assault on the £700bn UK savings market as a complement to its large (and possibly maturing) position as a retail investment funds supermarket. HL has about 675,000 active clients, perhaps six or seven times the number of individuals currently lending via P2P platforms in the UK. It says 45% of them have cash savings of £75,000 or more and 70% would use HL to manage their savings if the company entered this market – in theory, therefore, these people fit the profile of potential P2P lenders very nicely. HL has also talked of offering its investment customers the opportunity to borrow via its P2P platform and use their portfolios as security for their loans, presumably enabling them to pay lower rates of interest. That might turn out to be a neat trick that others would find hard to emulate, although how popular it would prove in practice is hard to say.

 

HL’s aim is to “become the preferred retail venue for managing cash savings in the UK, for existing clients and new savings clients, without needing a banking licence”. Partly, this is about creating a new growth area for the business. But it’s also a defensive reaction to the impact that the collapse in deposit rates has had on its profits. HL holds a lot of its clients’ cash that is either waiting to be invested or is the proceeds of investments they have sold. In the past, it used to make a decent chunk of its profits by depositing that cash in the bank and holding on to some of the interest it earned. In the six months to December 31, HL says that changing regulation along with falling deposit rates cut the spread between the interest it receives on client cash and the rate it passes on to its customers from 1% to 0.62%. That represents a £4.8m year-on-year drop in interest income – waving goodbye to that much “free money” has to hurt.

 

By creating a P2P lending platform, HL reckons it could earn a spread of at least 1% between the rate it would pay to lenders and the rate it would charge to borrowers. Given what’s happened to its interest margin on client cash deposits, you can see why this would make sense.

 

So the logic of HL creating a P2P platform is clear. It has lots of existing customers who are well off and looking for ways to create a better return on their cash savings. It has a popular and trusted brand that might well be enough to make those people feel safe to try P2P lending with HL. It’s already a huge ISA provider and P2P lending will soon be an ISA-eligible asset class. And it is a truly formidable marketing machine that could “mainstream” the idea of P2P lending with a ruthless efficiency that few could match. Describing the attractions of marketplace lending, one of the bullet points in its analyst presentation states with characteristic directness: “Good principle. Needs scale. HL has that scale.”

 

So what’s in store? Personally, I would expect HL to concentrate, at least initially, on consumer lending, possibly including property loans, because credit data in this market is plentiful and underwriting tends to be a much more standardised process than in small business lending, for example. It might even decide an acquisition is the way forward, rather than building an operation from scratch.

 

But either way it won’t be plain sailing, not least because P2P lending differs in important respects from HL’s core business of selling investment funds. In that market, scale brings huge benefits because it allows HL to lean on fund managers to lower their charges, making its offer more competitive than others’ and allowing it to pass on the benefits to its customers in lower fees. But in P2P lending, scale is not necessarily such a benefit. The ability to bring a lot of money to the market will be an advantage only as long as HL can avoid driving down lending rates and/or accepting higher-risk borrowers with lower credit ratings in order to find enough homes for all that new money.

 

This probably explains why the company insists that any move is “at least 18-24 months” away. The P2P market is growing fast, but given HL’s scale it will need another couple of years at present growth rates before it will start to look big enough to accommodate the elephant in the P2P room.