2017UK Digital LendingLandscapeEdited by: Katie Darden Design by: Cat WeeksReport by:Eric Turner2127th Street NE, Charlottesville, VA 22902 Phone:+1.434.977.1600Fax:+1.434.293.0407spglobal/marketintelligence2017, S&P Global Market Intelligence. All Rights Reserved.Proprietary and Confdential. Use limited and subject to S&P Global Market Intelligence license.2017 UK Digital Lending Landscape22127th Street NE, Charlottesville, VA 22902 Phone:+1.434.977.1600Fax:+1.434.293.0407spglobal/marketintelligence2017, S&P Global Market Intelligence. All Rights Reserved.Proprietary and Confdential. Use limited and subject to S&P Global Market Intelligence license.Table of contentsI. Executive summaryII. IntroductionIII. Evolution of digital lending in the U.S. and U.K.IV. Defning the industryPersonal-focused lendersSmall and medium enterprise-focused lendersProperty-focused lendersV. Rapid loan origination growthPersonal-focused lendersSmall and medium enterprise-focused lendersProperty-focused lendersVI. Areas of innovation differ from the U.S. marketMore human intervention in underwritingSophisticated investment optionsAdditional safeguards for investorsLess funding and less technology growthVII. Regulation and government add legitimacyThe regulatory landscape since 2014Strong government supportMore regulation could be coming soonVIII. Resilience in the face of BrexitBrexit headwindsBank lending to SMEs down in 2016Digital lending to SMEs grew in 2016Increased potential demand from new investment optionsIX. Technological innovation needed before more growthX. Index of footnotes2017 UK Digital Lending Landscape32127th Street NE, Charlottesville, VA 22902 Phone:+1.434.977.1600Fax:+1.434.293.0407spglobal/marketintelligence2017, S&P Global Market Intelligence. All Rights Reserved.Proprietary and Confdential. Use limited and subject to S&P Global Market Intelligence license.Executive summaryoSince 2005, when the world’s frst digital lender started offering loans in the U.K., the markethas grown to include new product segments and investors while also capturing the backing ofthe British government and regulators.oS&P Global Market Intelligence estimates that nine major digital lenders in the U.K. have origi-nated 6.69 billion in loans since their respective inceptions. Annual origination volumes grew33.97% year over year in 2016 to an estimated 2.74 billion.oEven as bank lending declined for small and medium enterprise borrowers leading up to and fol-lowing the June 2016 Brexit vote, U.K. digital lenders grew originations in this segment 81.84%year over year to 357.5 million in the fourth quarter of 2016.oWhile U.K. growth has been rapid, the nine-largest digital lenders featured in our 2016 U.S. Digi-tal Lending Landscape have grown originations to an estimated 53.69 billion since the industrystarted there. U.S. lenders have had the funding to focus on technical innovation.oThe nine U.K.-based digital lenders in this report have raised a collective $470.6 million in eq-uity funding from 2004 through 2016, while the top nine U.S.-based digital lenders raised a col-lective $3.49 billion during the same period.oU.K. digital lenders have largely been slow to embrace digital innovations, like automated ap-plication and underwriting models, which has likely slowed growth.oWhile underwriting innovation has been limited, U.K.-specifc options like pooled investmentaccounts and reserve funds offer features not seen at U.S. peers.oRegulation and government support have helped legitimize the digital lending industry inthe U.K., and the inclusion of new tax-exempt individual savings options could provide a fur-ther boost.oAs interest increases in the sector from both borrowers and investors, U.K. lenders will need toembrace technology to increase effciency.As of March 31,2017,1 was equivalent to $1.25.Loan origination fgures for U.S. digital lenders wereconverted to British pounds based on average exchange rates for each quarter measured. Venturefunding fgures in British pounds were converted to U.S. dollars based on exchange rates of investmentannouncement dates.2017 UK Digital Lending Landscape42127th Street NE, Charlottesville, VA 22902 Phone:+1.434.977.1600Fax:+1.434.293.0407spglobal/marketintelligence2017, S&P Global Market Intelligence. All Rights Reserved.Proprietary and Confdential. Use limited and subject to S&P Global Market Intelligence license.IntroductionThe digital lending sector got started in the U.K. in 2005, but its growth has been slower there than inthe U.S., where it emerged later. U.S. digital lenders compete with banks using algorithmically drivensystems to provide faster access to credit along with advanced underwriting models that can poten-tially better assess risk and reach more borrowers. U.K. digital lenders for the most part have retainedmore manual processes in their operating models, relying on representatives, underwriting committeesand other human elements for making lending decisions.That does not tell the whole story, however, and while U.K. lenders could use a boost in innovation, theirmarket is well established and regulated. This report explores the evolution of the industry, growthin originations, current events impacting the market and how U.K. lenders can catch up to the highergrowth rates seen at U.S. frms.Evolution of digital lending in the U.S. and U.K.Digital lending in the U.K. can be traced to the frst peer-to-peer platform, Zopa, which started offeringpersonal loans in early 2005 and is now the country’s largest platform by originations.The peer-to-peer model, which matched individual investors with individual borrowers, gradually shift-ed toward a marketplace lending model. Marketplace lending includes the traditional peer-to-peerlending structure as well as larger institutional investors that purchase whole loans. Alongside thisshift, new platforms have emerged, and additional products focused on small and medium enterprises(SMEs) and, more recently, property lending have become commonplace.U.K. digital lenders exclusively operate in a peer-to-peer or marketplace model due to regulation. Thecountry’s Financial Conduct Authority (FCA) regulates these companies, which it calls loan-basedcrowdfunders, and does not allow them to extend credit. Instead, they act as matchmakers of sorts,providing an electronic system for pairing up investors and borrowers.This contrasts with the U.S. digital lending market, where specifc regulation has not yet found its wayto the industry. U.S.-based lenders tend to focus on offering high-tech lending solutions; while someoperate under a marketplace lending model, others lend directly from their balance sheets or use ahybrid model.We estimate that the top nine lenders featured in our U.S. Digital Lending Landscape had originateddigital lenders featured in this report had originated 6.69 billion from their inceptions through thesame period.This divergence in growth, despite a head start in the U.K., is likely due to two major issues. First, U.K.lenders have relied exclusively on a marketplace model where capital to fund loans is subject to inves-tor supply. Lenders in the U.S. have mostly moved toward a combination of marketplace and balance2017 UK Digital Lending Landscape52127th Street NE, Charlottesville, VA 22902 Phone:+1.434.977.1600Fax:+1.434.293.0407spglobal/marketintelligence2017, S&P Global Market Intelligence. All Rights Reserved.Proprietary and Confdential. Use limited and subject to S&P Global Market Intelligence license.sheet lending, or exclusively balance sheet lending. This strategy allows for further capacity to fundloans in times of high demand.Second, many U.K. digital lenders have been slower to adopt more automated systems that can speedup the process for applying for a loan and receiving funding. While their U.S. peers built extensive tech-nologically driven back-end systems to automate underwriting, approval and funding, many U.K. frmsstill rely on differi