Is P2P lending a threat to banks?
Peer-to-peer lending may have been around for a decade, but it’s fair to say that only a handful of people within the UK would have been familiar with the concept until a year or two ago. Today, it finds itself poised for a meteoric rise, with money lent through UK platforms alone having doubled in value to £1.8 billion in 2014, and on the back of the announcement that it will be included within ISAs from 2016, estimates suggest this number could escalate to £45 billion in the next few years.
It’s a steep upward curve indeed, and one that has become impossible to ignore within the world of finance. Yet the question remains: are the high-street banks, embedded in a well-established sector worth countless billions, shaking in their boots at all?
Evolution, not revolution
Our CEO Nick offered a fascinating take on the debate in a recent guest column with AltFi, dismissing the idea of a revolution as “wholly fanciful.” Instead, he explained that P2P lending, and indeed alternative finance as a whole, are not replacements for the existing institutions, but merely a significant contribution to the positive change taking place in consumer finance.
In addition, he provided examples of how banks (and insurers) have actually warmed to the presence of P2P lending companies, and even collaborated in some respects.
Although it will disappoint a few evangelists, who may find such “myth busting” rather anticlimactic, it provides some absorbing insight into the transparent approach of a company like Lending Works. Opting for aggressive, intrusive methods and attempting to transform the financial landscape doesn’t feature in the modus operandi, and the belief is that the efficiency of the concept can sell itself.
Yet therein lies a crucial element of its appeal. Consumer trust has never been something banks could claim to possess in abundance, and it simply bottomed out as the recent recession bore its teeth. Since then, the emergence of P2P lending has not only provided an attractive alternative, but also left some scratching their heads as to how banks have got away with offering such non-existent rates on savings for so long.
The important clarification here is risk, and with the Financial Services Compensation Scheme covering £85,000 per person (per firm) for bank account holders, the monies withering away in savings accounts are at least secure.
However, regulation by the Financial Conduct Authority from April 2014 has enhanced consumer trust in P2P lending, along with the formation of the Peer-to-Peer Finance Association. Measures such as reserve funds and strict loan underwriting are now also commonplace in the quest to diminish borrower arrears and defaults. In addition, the peerless insurance offered by Lending Works against borrower default means its customers can sleep soundly at night.
The online platform brings another pivotal element to the table too, making a mockery of the inconveniences that arise when dealing with banks or building societies. It really is a case of both minimum effort and minimum risk in exchange for handsome rewards.
The guard isn't changing - yet
Of course, that’s not to say these old establishments, which have been around for hundreds of years, will be usurped in the near future. The tectonic plates aren’t shifting, there is no collision course, and we aren’t on the brink of any war. As Nick points out, the gap between old and new will instead grow less stark due to the boundaries becoming blurred as the versatile P2P platform opens itself to a variety of partnerships. Even with the so-called “enemy!”
But what the advent of P2P lending has also done is give the kings of the high street some serious food for thought. No longer can these behemoths blindly dictate the rules, and the surge of this new platform demands that wholesale changes are made within their ranks if they are to keep up. Whether P2P’s impact has simply given them a nudge, or, better yet, a jaw-crunching left hook, remains to be seen. But either way, the (im)balance of power is in for a shake-up, and that can only be a great thing for consumers.
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The peer-to-peer (P2P) lending industry is now regulated by the Financial Conduct Authority (FCA). The regulatory framework has been designed to protect customers and promote effective competition.
Loan underwriting is the process that we undertake to analyse all of the information provided by each loan applicant and their credit file to assess whether or not that applicant meets our minimum loan criteria. As part of that process all data is verified, analysed and summarised to paint a picture of each applicant.
When you earn interest from a regular bank savings account, for example, the bank automatically deducts basic rate tax (currently 20%) before paying your interest. With interest earned from peer-to-peer lending, tax is not deducted automatically so lenders will need to declare their income to HMRC.
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