Many people doubted whether peer to peer lending would ever really take a foothold in the UK; however the sector appears to be going from strength to strength and increasingly accepted as a credible alternative to the banks.
Compared with mainstream banking this new breed of finance is still in its infancy with Zopa, the UK’s first peer-to-peer lender still less than eight years old.
A lack of confidence in the UK banking sector since the credit crisis combined with high borrowing rates and low savings returns has seen the peer to peer market flourish, with new providers entering the industry in the last couple of years.
Zopa remains by far the biggest player and to date has arranged more than £200 million in loans, including a monthly record of 1621 loans totalling £8 million in July alone – up by 72% on the same period last year.
A more recent player on the peer to peer scene and acting as the middle man for individual savers and borrowers is Ratesetter, launched in October 2010 and to date has already provided over £30 million in loans. 2012 has seen a major increase in demand for loans with applications for funds currently running at around £1 million per day and business levels up 45% on the 2011 numbers.
Along with Zopa and Funding Circle, Ratesetter formed the Peer2Peer Finance Association, a UK trade body set up to ensure that the sector maintains high minimum standards of protection for consumers and small business customers.
The peer-to-peer market is not solely aimed at personal customers and with banks tightening credit policy and reportedly increasingly reluctant to lend to SMEs, we’ve seen the emergence of a new breed of business lenders including Funding Circle and Crowdcube.
Funding Circle has lent more than £49.3 million to businesses since launch in 2010, with the average loan at around £39,000. The company pools the savings of investors, who have averaged returns in excess of 8.3%, whilst the current bad debt ratio is just 0.3%.
Consumers shouldn’t see this alternative banking concept as a soft touch, as strict credit scoring criteria is absolutely vital to ensure defaults are kept to a minimum to give people confidence to continue to deposit their savings with the peer-to-peer companies.
Ratesetter for example recently stated that only 10-15% of loan applications are approved, so whilst it may offer a simpler and fairer way to borrow money, if you don’t have an excellent credit profile you’re going to have to seek your finance elsewhere.
One of the main concerns with people depositing their cash with peer-to-peer providers is that although the returns far outweigh those paid by the banks, they don’t offer the cast iron guarantee to savers that bank customers enjoy under the Financial Services Compensation Scheme.
Even though tough credit scoring criteria is in place, there is still an element of risk, albeit small, that you don’t have with a bank or building society. As long as you understand and are comfortable with this, lower overheads of not having to run a nationwide network of branches, means you can obtain better returns on your cash in the peer-to-peer market.
Providers have their own methods of trying to mitigate the risk to depositors. Zopa for example, will spread your money amongst a wide range of borrowers, whereas Ratesetter adopts a different approach by operating a ‘provision fund’ which is built up from borrower fees, and reimburses lenders in the case of late payment or default.
The more established this market becomes, the more confidence consumers will have and if providers continue to keep rates competitive and bad debt levels at current low levels the peer-to-peer industry will soon take a much bigger slice of the UK personal finance market.