Peer-to-peer lending must remain true to its roots
THINCATS’ founder and chairman Kevin Caley (pictured) tells Peer-to-Peer Finance News why it has never been more important for the P2P sector to remember its roots.
In August 2014, George Osborne announced that the UK was “at the dawn of a new era in banking” before recognising the potential of peer-to-peer lending and other financial innovations to “transform our lives”. Speaking at a fintech conference in London’s Canary Wharf, the former chancellor was right to acknowledge the changing tide, however from his comments one might have assumed that P2P finance was a new form of banking. In fact, the industry was built on distancing itself from the values and practices of high-street lenders and it must continue to strive for this quality if it is to remain attractive, alternative and true to its origins.
When the financial crisis struck in 2008, a wave of innovation began to wash over the financial services sector. As banks tightened their purse strings and interest rates plummeted, businesses in need of funding and investors in search of returns were forced to look beyond high-street banks. This growing need spurred on new forms of finance, including P2P lending, which set out to differentiate itself through its insistence on transparency and commitment to providing lenders with high returns, and borrowers with a quick and supportive service.
For many platforms, this meant adopting a ‘pure P2P’ approach, giving lenders the ability to choose the borrower they wanted to support, while using an auction to set a fair market interest rate. This concept was part and parcel of the disintermediation and disruption that characterised P2P. The initial evolution of the sector was aided by the lack of regulation for business lending, and subsequently by the Financial Conduct Authority’s new remit to promote competition and innovation. Now though, this freedom to innovate has seen the boundaries pushed too far, with some platforms claiming to be P2P while clearly displaying the characteristics of fund managers or banks. Balance sheet risk and leveraged loans can now be found under the P2P umbrella. This is problematic as retail investors may not be fully aware what they are entering into when they sign up to so-called P2P lenders. Membership of the P2PFA is a reliable seal of transparency, but several new entrants outside this circle are stretching these standards.
In response to this, it is crucial that the industry’s leading players retain the qualities which set them apart in the first place so that P2P does not just become a new form of banking, as Osborne once implied. The involvement of institutional funds will inevitably influence the way that the sector behaves. Indeed, attracting and keeping institutional investors is now the most important objective for platforms searching for rapid growth and an eventual trade sale or flotation. But platforms aiming for stability and longevity must manage these pressures carefully and avoid turning their backs on the early-adopting private investors who helped to create this new asset class.
The founders of P2P set out to make a difference and show people that there was a viable, credible alternative to banks. The industry’s initial qualities must be retained if it is to avoid turning into another financial institution.