Peer to peer lending
Tired of banks? Join the queue. Depositors want better interest rates. Consumers want alternative sources of finance. Governments want more lending, but banks must deleverage to meet global capital rules. Cue peer-to-peer (P2P) lending, online platforms that match investors with borrowers. With no bank overheads, P2P lenders offer higher rates than mainstream banks. Never mind the attempts by UK policy makers to egg on challengers to the status quo, P2P is already on the case.
In seven years, Zopa, the UK’s largest such lender, has lent almost £260m gross. Another P2P lender, RateSetter, has lent nearly £50m gross. True, the market – at £380m – is still tiny, but its recent growth spurt has attracted the government’s attention. Last month it agreed to provide £10m to Zopa to match investor funding to the UK’s 3.5m sole traders, to help kick-start small business lending. Peer-to-business lender Funding Circle is already on that case: it lends only to small businesses. In its two-year life, it has lent £70m. The government just allocated it £20m for on-lending.
Returns for P2P investors can be relatively high. Zopa quotes an average of 5.5 per cent a year after adjusting for its 1 per cent set-up fee and average default rate of 0.5 per cent (well below that of mainstream banks). RateSetter quotes a similar amount, adjusted for its own 0.3 per cent default and set-up charge. It also operates a provision fund that has shielded investors from default.
Although P2P lenders use similar credit assessment techniques to those of the banks, default is the main risk faced by investors, who are not covered by deposit protection schemes. The main UK P2P sites have their own government-approved consumer protection standards. From April 2014 the Financial Conduct Authority will regulate them.
P2P lending is here to stay. Banks that are too fat to compete take note.
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