The process of borrowing and lending money usually involves a banking institution of some variety, but the emerging popularity of peer-to-peer (P2P) lending platforms is seeing some people remove traditional financers from the equation altogether.
Developments in technology have made it easier for individuals or businesses looking to lend or borrow directly with one another to connect via online platforms.
It is an industry on the rise, with the latest data from the Peer-to-Peer Finance Association (P2PFA) – a self-regulatory industry body for P2P lending in the UK – showing its member platforms facilitated loans worth almost £3bn in 2018.
P2PFA director Robert Pettigrew said: “There is clear evidence that the UK P2P lending market continues to mature, with discerning consumers increasingly aware of the variety of choice available to them across the broader market for loans.
“It is clear that customers are progressively savvy when selecting their loan provider – through increased use of online channels and price comparison sites.
“Feedback demonstrates that consumers appreciate the comparatively great value rates available through P2PFA platforms, as well as features such as ‘soft searches’ – where providers can get a personalised loan quote without marking their credit score – and no early repayment charges.
“In consequence, P2P loan providers are offering an increasingly attractive offering to customers.”
What are peer-to-peer lending platforms?
As an alternative to well-trodden financing methods, P2P lending matches people or companies looking to lend and borrow, allowing them to make direct arrangements between one another.
Websites, or platforms, provide an intermediary service which does the matchmaking between lenders and borrowers – performing the relevant due diligence risk assessments and credit checks.
These platforms often charge a fee for their services, but are not part of the final lending agreement.
In the UK, these services were brought under Financial Conduct Authority (FCA) regulation in 2014 to establish operating standards, and boost confidence and security to people looking to use them.
In acknowledgement of the growing popularity of P2P investments, the UK government introduced the Innovative Finance ISA in 2016, which offers tax-free savings on up to £20,000 of P2P-related savings.
There are a number of factors that make P2P lending an attractive alternative to traditional financing methods – but the potential high rewards do not come without risks attached.
Benefits of peer-to-peer lending platforms
Many lenders are attracted to P2P solutions by the potential for a high rate of return on their investment.
Typical estimated annual rates can reach 5% to 6% in the better-performing packages – and in some cases climb even higher – which is a much more appealing prospect than the rates usually afforded by standard savings accounts from the bigger banks.
For those looking to borrow money, there is the potential to find lower interest rates than traditional loans – but this is very much dependent on individual credit history and risk factors.
A wider range of borrowing options in the marketplace, however, presents more avenues for loan-hunters to pursue – which is a good thing for people who have experienced difficulties in securing loans the old-fashioned way.
For both lenders and borrowers, P2P platforms are billed as being more agile, efficient and transparent to deal with than banks, as they are unencumbered by the bureaucracy and ageing technology that is the hallmark of many bigger institutions.
Stuart Law, CEO at UK P2P lender Assetz Capital, said: “Peer-to-peer lending aims to be beneficial for all parties involved.
“Investors typically benefit from the attractive headline rates of loan interest – particularly in the UK at a time when the Bank of England base rate is low.
“Borrowers may gain approval for loans that banks may have rejected in the past.
“It’s not about P2P taking greater risk of loss necessarily, but more to do with the banks’ lessening appetite for business lending in general, and their strict ‘tick box’ approach to loan approval – which can often exclude growth and entrepreneurial businesses unable to show a consistent profit and cash history.”
Risks of peer-to-peer lending platforms
The big risk for lenders is that, unlike a low-yielding savings account with a bank, investments made through P2P platforms are not protected against defaulted payments.
In the UK, traditional savings accounts are protected by the Financial Services Compensation Scheme (FSCS) – which covers the first £85,000 invested by an individual or institution in the event of a non-repayment.
Similar schemes exist in other countries, but do not cover P2P investments.
Many platforms have developed their own safeguards and standards to assure potential investors that money will be protected if the worst should happen, but there is no regulatory refund guarantee.
Mr Law added: “Peer-to-peer lending, as with all forms of investment, comes with a degree of risk to your capital.
“In this case, the initial risk comes from borrowers that are unable to pay back their loan, and that any security taken for that loan does not then permit full recovery.
“Most P2P lending platforms have safeguards in place to help mitigate these risks – which include closely examining individual loan applications, the affordability of the loan to the borrower, as well as adding layers of protection like taking security on loans and offering provision fund protection to some degrees against potential losses.
“It is generally accepted that the higher the rates of return, the riskier the investment may be – and the risk of a given investment is often down to investor appetite.
“Investors should make informed decisions, and search out the right platform with the right model that suits their goals.
“For borrowers, the risk typically comes from the platform they choose to facilitate their loan – and fully investigating the platform’s lending history and understanding of its business is essential to selecting the one that is appropriate for the borrower’s needs.”
Companies offering peer-to-peer lending platforms
For those who decide the benefits of P2P lending outweigh the risks, there are a growing number of online platforms around the world that can be used to get involved.
In the US, LendingClub and Upstart are prominent service providers, while the likes of Funding Circle, RateSetter and Lending Works have operations in the UK and Europe.
Many of them offer specialised services, such as a focus on small business or property investment, and here we take a closer look at some examples of the different options out there to choose from.
Funding Circle
Funding Circle’s P2P platform aims to bring investors and small business owners together in one place, enabling SMEs to access the capital they need to grow, and lenders the potential to collect a strong return on their outlay.
The company currently operates in the UK, US, Germany and the Netherlands, and has to-date facilitated more than £6.3bn in loans to 62,000 small businesses across these regions, from a pool of 88,000 investors.
This financing helped to create 75,000 jobs globally during 2017, says Funding Circle, with small businesses like butchers, bakers, IT consultants and accountants all benefitting.
In the UK, investors using the platform include the government-owned British Business Bank, local councils, financial institutions and the European Investment Bank – as well as 79,000 individuals.
In a recent impact report on P2P lending, CEO Samir Desai said: “Technology has led to the emergence of online lending, bringing vital innovation to the way small businesses can access finance for growth and ensuring even businesses in the most rural locations can do the same.
“By combining proprietary risk models and cutting-edge technology with advanced data analytics, these platforms have made deep pools of capital available to them for the first time.
“This powerful combination also allows us to expand the market and help more small businesses – 16% of businesses tell us they wouldn’t have been able to access finance without us.”
StepLadder
UK-based StepLadder’s platform puts a collaborative spin on the P2P lending model, as well as specifically targeting its service at young people looking to save a deposit for their first home.
It takes inspiration for its community investment model from old-style credit unions and building societies, offering products known as ROSCAs (Rotating Savings and Credit Associations).
Founded in 2016 by Matthew Addison, StepLadder bills itself as a collaborative deposit peer-to-peer saving platform, where users are grouped together by their saving needs into “circles”.
Each member of the circle agrees to pay a fixed monthly sum into the scheme, and the accumulated contributions every month are allocated to one of the members by random draw.
This process is then repeated each month, until all of the circle’s members have received their new home deposit value from a combination of lending and borrowing.
StepLadder recently announced a partnership with collaborative savings platform Squad, which will allow aspiring homeowners to engage as a community via the Squad platform, and receive saving and mortgage advice throughout the process.
Zopa
Zopa is a P2P lender focusing more generally on the personal side of borrowing – billing itself as the first ever dedicated P2P lending company, and instrumental in the founding of the P2PFA.
Since it was established in 2005, the Zopa platform has enabled more than 76,000 individual investors to lend almost £4bn.
It has also picked up the AltFi award for best P2P consumer platform for the last two years running.
Last year, Zopa obtained a UK banking licence and plans to expand its product portfolio to include more mainstream digital banking services, like fixed term savings accounts and credit cards.
CEO Jaidev Janardana said: “Acquiring our banking licence is the starting point for Zopa to become a major force in retail banking.
“When we pioneered the peer-to-peer lending model globally in 2005, we did so by listening to customers and creating a better product for them.
“We will bring the same focus to our banking products – drawing on tech innovation, our values of fairness and transparency, and better customer service to help even more people to feel-good about money.”
