Looking back at the major changes since his last report 5 years ago, Andy Davis concluded on Monday evening that P2P platforms have "changed the game for small businesses, investors and regulators" in the UK, as he launched his latest CSFI report on new-model finance.

Key changes which can be attributed to the rise of the P2P industry include:

• Rapid growth in the number of finance providers serving the small business market. As well as the emergence of new challenger banks, there has been a dramatic expansion of technology-led, non-bank lending to small companies. UK P2P platforms have written around £4.5bn of term loans to businesses over the last 5 years.
• Digital innovation. The technology-led P2P platforms have revolutionised customer expectations and the way all lenders address SME borrowers. In this highly competitive market, traditional banks have had to upgrade their online services and provide faster credit decisions in response.
• Increased regulation.  In April 2014, a new regulated activity was added to cover platform operators, with its own regulations overseen by the FCA, to ensure borrowers have similar protections to those borrowing from traditional lenders. Obtaining full authorisation for this activity is seen as the ultimate goal for platforms wishing to operate in the UK.
• Launch of the Innovative Finance ISA. A new ISA has been created to allow consumers to invest in P2P loans tax-free.

Yet these game-changing developments don't mean it's all plain sailing for the P2P industry in its quest to reach the mainstream.  The major challenge now facing P2P platforms is how to generate the scale of investment volumes needed to move into profit and reach large numbers of borrowers.  Although origination issues are certainly not unique to the P2P market, it is inevitable that platforms which operate as pure intermediaries, with no loan capital to use, will struggle to generate high profits. Even traditional direct lenders find it difficult to maintain margins in the UK's heavily banked market.

In Andy's view, the most likely route to sustainable profitability for these platforms is the development of hybrid models where experienced direct lenders use P2P platforms to syndicate loans into the retail market, and retain a percentage of their fee income from platform investors through the lifetime of each loan as a servicing fee. This allows direct lenders to collect fee and interest income on balance sheet lending and syndication income from the P2P operation, as well as being able to recycle capital into new loans more quickly, generating more profit in the process.

So looking to the future, we can see no reason why the current pace of change in the P2P sector will not continue to generate exciting developments for consumers, investors and regulators alike. See you in five years for the next report, Andy!