Stuart Law (pictured), chief executive of peer-to-peer lender Assetz Capital, explains why the industry should stay true to its roots
Many of us know the basics of peer-to-peer lending but how is it actually evolving, what should really matter and what does the future hold?
P2P started out with people lending to other people and businesses. This was substantially in response to people receiving poor bank interest rates but also a response to demand for credit by people and businesses who just didn’t fit bank criteria.
It wasn’t that these borrowers necessarily were poor-quality credit but that they didn’t fit the checkboxes imposed by banks in order to be able to deal with the high volume of enquiries and indeed their own capital adequacy requirements.
As we entered the recession, the poor interest rate issue became much bigger as interest rates dropped further and this became a substantial driver in the growth of the industry. So what’s next?
As the industry developed and achieved scale, it became easier for institutional investors to ascertain the overall credit quality of the loans originated by a platform and they started to take notice. Institutions have their own views on risk and return and in some ways this has helped drive improvements in processes for platforms funded by institutions.
However, we have also seen some platforms move up the risk curve to what institutions hoped would be higher net returns after losses. The jury is still out on whether the current partnerships with institutions have been a good move for platforms to date but it most certainly is a sensible diversification of funding sources for larger platforms if handled well.
Working with institutional money can also save a lot of time and effort spent handling direct lender enquiries but we have seen reductions in engagement levels between platforms and their retail investors as a result.
We decided from the very beginning to go in a different direction and to date have funded most of our loans with retail money. This isn’t for lack of interest from institutions but to date we haven’t engaged with one that was able to make a material positive difference to our business and all of our stakeholders as well as achieve all of its own objectives. I’m sure that will change shortly for us but we have no intention of switching over to purely institutional funding and abandoning the roots of P2P: the people.
I think that one of the reasons for our divergence from many parts of the industry is that we still hold the same fundamental belief that was behind the founding of our company, that there is a difference between making money at all costs and making money as a result of making a positive and constructive difference to wider society.
We believe that the latter is more sustainable in the long term and will produce a better business. We believe that helping to provide much-needed income streams for people is a cause worth defending. It is all well and good the Bank of England signing off a base rate rise to, say, 0.5 per cent in November but this is unlikely to make much of a difference to bank savings rates until the base rate finally exceeds one per cent again.
Even then – and we doubt rates will exceed an average of two to three per cent in many people’s lifetime — it is known that only around 50 per cent of those base rate increases will feed through into bank savings rate increases.
The people are going to need alternative income investments for a very long time and those who are willing to accept the additional risk may well turn to P2P lending. We intend to support that and we would encourage the industry not to forget its roots.
For more information on Assetz Capital, go to https://www.assetzcapital.co.uk.