Britain's 2 biggest peer-to-peer lenders lost £50 million in the last decade

The UK's 2 biggest peer-to-peer lenders, Zopa and Funding Circle, have lost at least £50.5 million since the first platform opened up in 2005, according to an analysis of accounts by Business Insider.

These are not losses of investors who have loaned money over their platforms but losses made by the companies themselves in the course of running these platforms.

The big losses at Zopa and Funding Circle raise questions about profitability in the sector, which is dealing with slowing growth and increased scepticism from investors and the financial establishment.

The two platforms have facilitated almost £3 billion of loans between them but Funding Circle, founded in 2010, has never made a profit, while Zopa, founded in 2005, made a small profit 2 years running, totalling less than £60,000.

Here's the breakdown of Zopa and Funding Circle's financial performance, as per accounts filed with Companies House:

• Zopa: losses between 2005 and 2014 total £21.79 million, according to accounts filed with Companies House, on cumulative revenues of £25.84 million. The platform made a small profit in in 2011 and 2012, totalling £58,648.
• Funding Circle: cumulative net loss of £28.71 million on total revenues of £20.89 million, according to accounts covering 2010 to 2014. The company has yet to make a profit.

These losses have been funded by investment from venture capitalists: $273 million (£208.1 million) for Funding Circle and at least $56.6 million (£43 million) for Zopa, according to Crunchbase.

A hot sector cools off

Peer-to-peer platforms let individuals and institutions invest directly in consumer or business loans through the internet, although business models have grown increasingly complicated for many platforms. Zopa, which focuses on consumer loans, first pioneered the idea in 2005 but plenty more platforms sprung up after the 2008 financial crisis.

The sector was one of the hottest areas of tech at the start of last year, with investors mesmerized by fast growth rates.

But VCs, banks, and analysts are growing more wary after a series of bad news stories out of the US.

LendingClub, the biggest American peer-to-peer lender, lost its founder and CEO earlier this year over a scandal involving fudging loan details to sell on to banks. It is being investigated by the US Department of Justice.

Online lender Avant Credit has also been forced to scale back lending targets and headcount amid a slowdown in the industry.

Peer-to-peer lending volumes in the UK fell in the second quarter of 2016 for the first time ever.

Looking for alternative capital sources, Funding Circle launched the first European securitization of marketplace loans in May, but Reuters reported at the time that it "leant heavily on public sector entities... casting doubts over whether real-money buyers are ready to embrace the emerging asset class." US platforms Prosper and SoFi are both setting up vehicles to buy their own loans in a bid to attract more capital to keep growth going.

Neil Tomlinson, Deloitte's head of UK banking, concluded in an extensive recent report on the online lending sector that peer-to-peer lenders are "unlikely to pose a threat to banks" and "will not be significant players in terms of overall volume or share."

'Investors and the business have placed more value on investing in our growth'

The argument of both Zopa and Funding Circle is that they are losing money because they are investing in growth. That's fair - it's an established model for tech startups to plough money into winning market share and developing their product in the early years. Peer-to-peer also didn't exist just over a decade ago, so it's impressive that platforms like Zopa and Funding Circle have helped build it into a multibillion-pound industry.

Funding Circle, which offers loans to small businesses, declined to comment on its losses when contacted by BI but pointed to comments CEO Samir Desai made to BI last year when we reported the company's latest financial results. Desai said at the time:

"If you actually look at the core business of doing loans in the UK - strip away the technology investment and all the other extra stuff we're doing - the business is already profitable in the UK and is moving that way in the US as well. A lot of the investment we're doing is investing in creating a global business."

Zopa's CEO Jaidev Janardana told BI in an emailed statement:

"We have demonstrated that our business model is profitable with two consecutive profitable years in 2011 and 2012. Since then our investors and the business have placed more value on investing in our growth. In doing so we have been able to double our loan volumes last year, deliver positive returns for our customers at the same time investing in talent, technology, and our office.

"This all means we are in the best position to deliver on our strategic plan for continued growth and profitability long-term. Looking forward, I'm glad to say that we expect to be EBIDTA positive in Q4 2016 and profitable in 2017."

'Pressure will build on the industry to mature'

Christian Faes, CEO of the UK's fourth largest marketplace lender LendInvest, told BI he thinks that loss-making platforms will face increased pressure to turn a profit to "prove that they can." Remember, the growth that Zopa and Funding Circle are chasing could be disappearing.

Faes told BI: "There has been a lot of hype around FinTech and P2P and there is clearly huge potential, but in the next few years investor pressure will build on the industry to mature. It's no longer going to be about hitting impressive headline lending numbers; it's got to be more about trying to build financially viable businesses.

"Over the next few years, the businesses that can prove that they can make a profit will be the ones that are going to be around in another ten years, making a lasting impact on finance."

It's no longer going to be about hitting impressive headline lending numbers; it's got to be more about trying to build financially viable businesses - Christian Faes, LendInvest CEO

LendInvest, which lets investors put money into short-term mortgages for people looking to renovate then sell properties, made a pre-tax profit of £3.1 million in 2015 and £1.1 million in 2014.

Together Zopa and Funding Circle make up the number 1 and 2 peer-to-peer lenders in the UK by volume lent. Zopa, which offers consumer loans, has lent £1.55 billion since launch and small business lender Funding Circle has lent £1.34 billion, according to recent figures from industry body the P2PFA.

Aside from LendInvest, Zopa, and Funding Circle, the UK's two other top 5 peer-to-peer lenders by volume have both made a profit.

MarketInvoice told BI earlier this year that it turned a profit in 2013 and 2014. CEO Anil Stocker added in an emailed statement: "We've had a profitable business model since the early days of MarketInvoice and in 2015 entered an accelerated growth phase."

RateSetter, the UK's third biggest peer-to-peer lender, has disclosed figures in the press in the past. They suggest the company made a total profit of £223,00 between 2013 and 2015, on revenues of £18.9 million.

A spokesperson for RateSetter told BI: "We have recorded a profit for two consecutive financial years, proving that our model works and is sustainable. We are now investing to scale up, broaden, and deepen our market while continuing to deliver maximum value for investors."