The FT.com has reported that Santander UK plc plans to move into the peer-to-peer (P2P) lending market and is in discussions with Funding Circle, one of the three biggest P2P lenders operating in the UK in a bid to create an alternative route to funding SMEs. This development represents a significant shift from traditional bank lending and embraces a business model that is growing rapidly.
What is P2P?
The way in which each P2P provider operates is slightly different but the basic principal is that individuals lend money to other individuals or SMEs through an online lending platform. Individuals can chose who to lend their money to, once the operator has carried out the necessary background checks. The loans offered to individual borrowers and SMEs are unsecured which means that investing individuals are attracted by the possibility of a relatively high return. Operators aim to match individuals looking for a better interest rate on their savings with individual borrowers and SMEs looking for lower interest rates than traditional banks are offering. The aim of the operator is clear…cut out the middleman and charge a small commission for doing so.
How common is P2P?
In the UK, the top three P2P operators are Zopa, Ratesetter and Funding Circle. Since its inception in 2005, Zopa has lent over £330m to UK customers, £107m of which was lent in the last year.
Whilst P2P lending is growing rapidly in the UK, it has also taken off in US and is expanding to other developed financial markets. The top US P2P operator, Lending Club is now headed up by a board of directors which includes, Lawrence Summers, a former US Treasury Secretary and professor at Harvard University and John Mack an ex-CEO of Morgan Stanley. In April 2013, Lending Club made loans of over $140m, which represented a 10% increase on loans made in March 2013 and triple the volume of loans made in March 2012.
Is there a downside?
There seems to be the perception that P2P operators will happily lend to anyone. However, P2P operators say that they adopt a tough lending criteria in order to keep bad debts to a minimum. It’s been reported that Ratesetter only offers loans to between 10-12% of applicants and only 51% of those applicants are offered the advertised rate.
The rate of return needs to be kept relatively high as whilst traditional banks are backed by the Financial Services Compensation Scheme which provides cover of up to £85,000 of deposits per individual, P2P lending is currently unregulated.
Zopa, Ratesetter and Funding Circle have established the P2P Finance Association, a self-regulatory UK trade body which has its own code of practice and they have also created their own protection policy for their lenders by setting aside a fund to cover any losses from defaulting borrowers. The UK Treasury Office has announced that P2P lending will be regulated in the near future but, the fact remains that until there is official regulation in place, individuals’ money is at risk and the government are looking to tighten up control before this new wave of lending grows too big.
P2P lending is still in its infancy and has a long way to go before all the traditional banks move into this type of lending arena. Nevertheless, the idea of individuals clubbing together to lend to other individuals and SMEs via an online platform, the rapid expansion of P2P lending itself and the possibility of interest from banks such as Santander UK plc make you wonder whether P2P lending could change the face of traditional SME lending forever.
Links: FT.com (subscription only) http://www.ft.com/cms/s/0/ac57bc8a-f07b-11e2-929c-00144feabdc0.html#axzz2Zs5bu8cR