2016 gave us Lending Club; record new business volumes; a slow start for the IFISA; launch of the Bank Referral Scheme; oh yes, and Brexit…and Trump.
So what of 2017? The answer to the question depends on your own recent experience and, to a certain extent, your politics.
For example, if you were in the ‘Remain’ camp for the EU Referendum, you may well conclude that 2016 was a disaster and 2017 offers little better; if you were for ‘Leave’ then probably the opposite will be true. Either way, it is now likely to be the uncertainty that is exercising your mind rather than any clarity about what lasting benefit or damage has been inflicted.
‘Uncertainty’ is the defining word of 2016. Uncertainty about the future is likely to have contributed to SMEs’ tendency to borrow less. The BBA reported in early December that the borrowing figures for Q3 were down by 13% on the previous year, while SME deposits rose by 5% to a staggering £170.4billion. Maybe the statistics reflect the fact that many smaller businesses have learned to do without the banks, still uncertain about the level of support that will be there and managing their businesses more prudently as a result. Or it could be a broader uncertainty about the future that is holding back investment decisions.
A Deloitte survey released this week found that 27% of 119 finance directors questioned were feeling more optimistic about 2017 (which compares to 16% in Q3). Good news. However, nearly half of those surveyed plan to cut spending and take defensive measures to protect their balance sheets and build up cash over the next year.
Whatever the cause, corporate wariness is not much help to a P2P lending sector that is bursting with private and institutional ‘yield-hunters’, but running low on borrowers. When Zopa went public in December with its momentous, if temporary, decision to stop inviting new investors because it was having difficulty in finding suitable homes for the cash, it was a responsible act that spoke volumes for the state of the sector. P2P platforms need both sides of the borrower/lender equation to be in balance and presently lenders outweigh borrowers.
To see why investors are piling into P2P loans is easy. A return of 0.1% from a bank deposit account pales in comparison with 6% from P2P, but how do you persuade creditworthy people or companies to borrow when their instinct is to manage without?
The only answer is marketing effort.
Direct origination is often wrongly perceived as the hard road. Agreed, it needs the most sustained effort and patience, because it requires brand building and lead nurturing - and patience is a commodity in short supply when investors are anxious for a quick return. But direct origination gives ownership of the customer relationship, better credit quality in the long run and a brand that will continue to attract borrowers into the future. An integrated inbound and outbound marketing strategy works to create a steady flow of leads into the pipeline. Some might even go down the folk2folk route and start opening branches on the High Street in a counter-cyclical offensive against the banks. Either way, despite the commitment needed to overcome the inertia and start the pedals turning, direct origination creates the greatest long term value.
The alternative is to rely on brokers for the supply of loans, or even to buy in loans from other financiers to put across the platform. Both are satisfactory, short-term fixes with fixed costs of acquisition and the promise of leverage, but both lay a platform bare to the changing whims and fortunes of the supplier.
The hardest road is the one most often painted gold - the affiliate programme. Long in the negotiation, affiliate programmes are often high on promise and short on delivery. To get one company to make sustained sales for another requires, not only a great deal of persuasion at the outset, but continuous internal marketing effort thereafter - a factor which is often overlooked. Include affiliate programmes in the mix by all means, but don't bet the ranch on one and make sure you have other irons in your origination fire.
So, as we look ahead to 2017, the forthcoming FCA review of the rules and regulations might loom largest in terms of events to monitor, but regulation is unlikely to be the biggest determinant of success or failure over the next 12 months - we predict it will be the ability to create sufficient borrower demand. Any economic weakness or instability in financial markets will slow volumes considerably, which means providers have to take the situation into their own hands and plan their origination strategies. Anyone that can't do this will either disappear or merge - the other likely story for 2017 (and one many say is overdue from 2016).
At The Marketing Eye, we remain optimistic for a sector defined by its innovation and sheer determination to succeed. To you all, we wish you a happy, positively disruptive and success filled New Year.