The 2019 ISA season is now in full swing, and it's as good a time as any to focus on financial planning - and, within that, looking ahead to your retirement years to ensure financial security.
How will institutional money affect our lenders?
PopularMuch has been said regarding the arrival of institutional money in the UK’s various peer-to-peer platforms, with many consumers left confused, and, in some cases, concerned by what they perceive to be an invasion by the corporates of an industry intrinsically intended for the people. Transparency is one of our core values here at Lending Works, and given that we’ve recently introduced institutional money into our supply of lending capital, we wanted to take this opportunity to explain why we believe it can be of benefit to you, the consumer, while also clearing up any misconceptions you may have.
The progress of peer-to-peer lending on a global scale has been remarkable in recent years. Growth in China has been particularly explosive, and, like the US, it is now a multi-billion dollar industry. In the UK, the figures are similarly impressive, with the sector having recently toppled the £2 billion mark, and with the imminent inclusion of P2P within the ISA framework, this figure is likely to escalate to £45 billion within a few years.
Perhaps somewhat at odds with the US and China though is the fact that much of the growth in the UK has been driven by consumers, as opposed to the financial muscle of institutional money with which the growth overseas has been fuelled. Yet commercial success will never stay off the radar of the bigger players for too long, and as institutions flock to the various platforms, the question becomes: can consumers co-exist with institutions peacefully?
Busting myths about the big fish
The first thing to clarify is that in the case of peer-to-peer lending, institutional money is still, in essence, retail or consumer money. All it involves is someone like you handing over control of your investment portfolio to a professional agent or entity.
In fact, the very presence of institutional money should be taken as a sign of encouragement by consumers. These institutions are run and managed by well-qualified professionals who research all investment opportunities heavily before putting their clients’ money into it. Not only does their arrival to a platform vindicate a consumer’s decision to lend peer-to-peer, it also vindicates their decision to cut out the (expensive) middleman and take control of their own finances!
Is it against the spirit of P2P?
One of the most appealing elements of becoming a lender is the satisfaction of cutting out the bank and helping creditworthy borrowers to better their lives with loans funded by you – a more preferable alternative to putting your money in a savings account and funding a banker’s bonus! While borrowers may be less concerned about the source of their loan, there is a definite synergy between the two sides that makes certain peer-to-peer platforms unique.
Some might view the introduction of institutional money at Lending Works as a violation of this unique interaction, but it need not be. As mentioned, institutions are ultimately just representatives of consumers on a larger scale, and it will never be a prerequisite for our lenders to go through an intermediary.
More importantly, the presence of institutional money ensures that the high demand from our creditworthy borrowers will always be met. The flow of lending capital from consumers is generally seasonal, and can vary depending on numerous external factors. The ability of institutions to inject greater amounts of capital ensures that our platform will always be able to function with the required level of liquidity.
Will everyone be treated the same?
In the US, in particular, there have been issues regarding preferential treatment. With some platforms, consumers have been sold short by virtue of institutions - who typically bring more money to the table - being able to 'cherry pick' their loans. As such, consumers could be left with a pool of borrowers with inferior risk grades, thus increasing the likelihood of defaults on their loan repayments.
At Lending Works, we have a loan-matching algorithm we call the ‘Fair Algorithm’, which ensures that all lending capital – be it institutional or consumer – is treated equally. Therefore no lender is unfairly prejudiced, either in terms of the quality of borrower their money is lent to, or the time it takes to match the funds.
Lending Works’ founder and CEO Nick had this to say on the matter: “Consumers are the foundation upon which the peer-to-peer lending industry was built, and will always be the heartbeat of our day-to-day work. Yet we believe the inclusion of institutional money is a positive step forward for our platform. Not only will it give other consumers the confidence to follow suit, but it will significantly increase our growth potential, which can only mean good things for everyone involved.
“Aside from the Fair Algorithm, which ensures each lender is treated impartially, the enduring principles and integrity upon which Lending Works was founded will ensure that no customer will ever experience any barriers to entry. In fact, consumer money continues to form the majority of our lending capital, and our focus will always centre on the consumer.
“The presence of institutions will only enhance our business model, and we’re excited about the sustained benefits this will bring for both our lenders and borrowers.”
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