Peer-to-Peer Lending: The Retail Market Closed, and Here Is Why

You cannot invest through LendingClub as a retail lender, and you cannot do it through the three platforms that dominated the UK either. This is not one company withdrawing a product. Between 2020 and 2022 an entire asset class became largely unavailable to ordinary investors.

What actually happened, platform by platform

LendingClub retired its retail Notes platform with effect from the end of December 2020. Notes had let individuals buy fractions of consumer loans, and the secondary market that let them sell those fractions early, operated through Folio, was discontinued that August.

The reason it gave was structural rather than a failure. Having acquired a bank, it said that under a banking framework it was not economically practical to continue offering Notes. A company becoming a bank has cheaper deposits to lend and no need for retail lenders.

In the UK the same thing happened three times. Zopa, the original P2P lender, exited retail lending and returned funds to around 60,000 customers, citing investor sentiment and tighter regulation. RateSetter closed its P2P operation after being acquired by Metro Bank, with retail lender accounts closed in 2021. Funding Circle shut its retail investor platform in March 2022.

Why a whole market withdrew at once

Three pressures arriving together. Regulation tightened considerably after several smaller platform failures, adding cost and restricting how these products could be marketed to ordinary investors.

Cheaper funding became available. A platform that can take deposits, or that can sell loan books to institutions, does not need thousands of small lenders, and servicing thousands of small lenders is expensive.

And demand softened. Retail appetite fell after a period in which defaults, platform failures and liquidity freezes had made the risks concrete rather than theoretical.

What retail lenders actually learned

The advertised return was never the expected return. Headline rates were gross of defaults, and the net figure after bad debt was materially lower, which is normal for lending and was not always prominent.

Liquidity was the sharper lesson. Money in these platforms was lent out for a term, and the ability to exit early depended on a secondary market that worked when nobody needed it and stopped working when everybody did. Several platforms suspended withdrawals under stress.

And it was never covered by the deposit guarantee scheme. That was disclosed, and it was consistently underweighted by investors comparing a P2P rate against a savings account rate as though the two were the same kind of thing.

What is left, and whether it is worth it

Smaller platforms continue, generally in niches — property-backed lending, business lending against specific security, invoice finance. They are real, some are well run, and they are a different proposition from the mass-market platforms that left.

The questions to ask are the ones the last cycle established. What is the net return after actual historic defaults, not the gross rate. How do I get money out early, and what happened to that mechanism the last time markets were stressed. What security sits behind the loan, and who values it.

And the structural one: is the platform regulated, and what specifically happens to my loans if the platform itself fails. There should be a documented wind-down arrangement, and reading it is the minimum diligence.

The pattern worth taking from it

This is the second time on this site that an entire consumer product category has quietly withdrawn: the retail broadband resellers went when full fibre arrived, and retail P2P went when regulation tightened and cheaper funding appeared. In both cases the customer was not the reason the business existed, and when the economics changed the customer was the part that was dropped.

The practical lesson is about where you sit in somebody else's business model. If a platform needs your money because it has no cheaper source, you are essential and it will look after you. If a cheaper source becomes available, you are a cost centre with a servicing overhead, and the exit is orderly rather than dramatic: a letter, a wind-down period, funds returned.

That is not a reason to avoid new financial products. It is a reason to ask, before committing money for a term, what happens to you if the platform's funding gets cheaper elsewhere, and to prefer arrangements you can leave on your own timetable rather than on theirs.

What most people used it for instead

The appeal was a return above savings rates without the volatility of equities. Two things now occupy that space more straightforwardly.

Cash savings, which became genuinely competitive again after a long period when they were not, and which carry deposit protection up to the scheme limit per institution. For money you might need, that is the honest comparison.

And for longer horizons, a diversified investment inside an ISA or pension, where the volatility is real but the historical long-run return is better documented than any P2P platform's. See the four decisions that matter and what contributions produce over time.

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