By Nick Harding, founder & CEO of Lending Works, the UK’s #3 consumer P2P lender.
There’s no doubting that the peer-to-peer lending industry is growing exceptionally fast. According to recent research by University of Cambridge and NESTA, the alternative finance market in the UK alone grew 150% in 2013 and will exceed that again by the end of 2014. Of that market, peer-to-peer is the dominant player too: of the £1.74 billion raised in the alternative finance market by the end of this year, more than £1.2 billion was lent and borrowed on peer-to-peer platforms.
But despite this extraordinary expansion I feel increasingly uncomfortable calling peer-to-peer lending a ‘phenomenon’ of the global financial services.
Isn’t peer-to-peer lending just accomplishing what its customers have been craving: simplification and democratisation of the lending and saving experience? After years of banker-bashing, very low interest rates, PPI scandals and a scarcity of competitive borrowing options, customers have wanted banking to get back to basics. There is an appetite for a new way of lending – and preferably one that pays a decent rate of return.
To call peer-to-peer lending a ‘phenomenon’ encourages scepticism. Of course, it is natural that anything new will generate some cynicism; but undue uncertainty threatens to shine too bright a light on unnecessary fears, detracting from some great opportunities and benefits that the industry has to offer.
Lending money directly to companies or individuals is what banks have always done, but peer-to-peer lending cuts out much of the bureaucracy and paperwork needed to do it, making it more efficient and simple. It also allows lenders to know the type of person borrowing their money, and what for.
Thanks to this simplicity, peer-to-peer lending has a great future ahead of it. Indeed, the same NESTAresearch estimates that the whole alternatives market could double in size to £4.4 billion by December 2015.
However, for this to happen, we need to recognise and deal with another simple truth about peer-to-peer lending. We are operating in a sector that carries risk and we shouldn’t shy away from this fact.
There is risk attached to every personal finance transaction, and the greater the risk, the higher the potential return. Everything we do in life carries some risk – whether that’s crossing the road, buying a house or proposing to a future spouse. Peer-to-peer lenders need to explain as an industry that we mitigate risk in new ways that may not be familiar to lenders and borrowers accustomed to the old ways of doing things. Risk is something we acknowledge and we plan for.
Risk isn’t new in financial services, of course. The UK’s banks and building societies have beenprotecting savings under the Financial Services Compensation Scheme for the last 13 years. Whether or not that cover is still fit for purpose or needs to modernise to the remain relevant in a financial environment that is more diversified than ever and where customers take more control than ever is under question by many in the peer-to-peer industry. It will be interesting to see how the ‘traditional’ institutions respond to consumer pressure.
At Lending Works, we acknowledge the risks of lending, and so insure our lenders’ money against borrower default as a result. Savers can lend their money with us knowing that we offer protection. Our lenders have protection even in the event of a major market downturn in which borrowers lose jobs, loans can’t be paid and platforms’ reserve funds are depleted.
Innovation can be difficult because people are naturally wary of new ways of doing things. We know peer-to-peer lending is the new kid on the block and recognise we need to educate customers about how we work. It is our responsibility to make peer-to-peer better, safer and more attractive and ensure customers feel confident about saving with us.
We fully support UK government regulation, but it is slow to be implemented and is too broad in its coverage for a dynamic industry that is still finding its feet. While new tax relief measures are widely welcomed, rules and regulations that accompany the benefits may miss the mark or stifle innovation. At worst, peer-to-peer lending could end up mirroring the established banking business we are trying to compete with.
Peer-to-peer lenders provide much-needed choice for customers who are prepared to accept greater risk for a greater reward – while knowing their money won’t be lost. The fact established banks have followed our lead shows that we have the potential to shake up the financial services industry. That can only be good for the consumers we serve and protect.