Peer to Peer lending: a growing financial service you won't find on the high street
Many consumers are still unaware of peer to peer lending but recent research by Ipsos would suggest that these online based lenders are a growing competitor of high street banks and their success is only just beginning - after all 2% of new loans in the UK are provided by Zopa. The sector also appears to have a strong endorsement from Andy Haldane (Bank of England Executive Director for Financial Stability). He says ‘at present these companies are tiny. But, a decade and a half ago, so was Google’. The increasingly positive sentiment towards peer-to-peer lending is backed up by Ipsos’s latest annual survey of Personal Finance Journalists where Zopa makes a large jump to 19th in terms of favourability (this is a figure of favourable journalists minus those who are unfavourable). They also rank second as being one of the most successful companies in the next few years.
An increasing number of consumers are starting to approach peer to peer lending companies such as Ratesetter and Zopa where investors can expect an interest rate of between 1-6% depending on how long they are willing to commit for, and the level of risk that they are prepared to take. These sites allow you to lend money directly to borrowers and therefore for investors interest rates are higher and for borrowers the rates are lower than what is currently being offered by retail banks. This is because there are no branches, no capital reserves and low overheads. However, the risk is higher as these companies are not governed by the Financial Services Compensation Scheme.
The Ipsos veracity Index shows that 75% of consumers do not trust bankers to tell the truth but peer to peer investment companies operate on a completely different open and honest playing field. On the front page of Ratesetter there is a ‘need to know’ tab. Under this tab it is clearly explained to the investor that there is a risk attached to an investment and not all investments return a profit. They write ‘Before you start using Ratesetter, we believe it’s important to understand the risks as well as the rewards: as they say, there is no return without risk’. Ipsos research shows that communicating honestly and providing value for money are both key drivers of trust, and this attitude of laying out the risk is something which the banks have been heavily criticised for not highlighting.
The growth of peer-to-peer lending companies has taken place alongside the digital revolution. An increasing use of digital channels has meant that consumers can side step the banks and do things that we previously trusted them to do. For example, financial advice is readily available online and in the UK we see growing numbers of consumers using these sources. The increasing likelihood for consumers to move their finances online means that new entrants can disrupt the traditional bank client relationships that were maintained by visits to local branches or over the telephone. As Andy Haldane puts it ‘The banking middle men may in time become the surplus links in the chain’.
The opportunity or problem if you are a bank is if these peer to peer investment companies start to attract financial advisors and institutional investors. This coupled with governance from the Financial Conduct Authority from April 2014 means that these companies will be more easily able to compete with the banks and also increase the expectations on the banks to be honest about returns and the risks associated.
