The topic of peer-to-peer lending made a welcome appearance on BBC radio last week in the form of a Today Programme interview with Zopa CEO Giles Andrews and James Meekings, founder of FundingCircle, the platform for P2P business loans.
Simon Jack, the programme’s business and economics reporter, focussed on the recent moves by the likes of Metro Bank into P2P lending as well as the fact that institutional investors such as hedge funds and even the likes of Goldman Sachs had started to “muscle in” on P2P. “This isn’t the P2P that we were promised,” Simon said.
As the name suggests, peer-to-peer lending was originally envisaged as being between private individuals, and indeed today, the lion’s share of lending and borrowing on platforms such as Zopa and Funding Circle is still carried out by people rather than organisations.
But institutions such as banks, as well as local and national government, are playing a bigger role as lenders. So why is this – and is it necessarily a bad thing?
As Giles said on Radio 4, the growing involvement of traditional lenders in P2P “validates the fact that we are more efficient and that we’ve done a really good job in managing credit and risk”.
In other words, the banks’ own systems of allocating credit to individual or business borrowers are too cumbersome or expensive when compared with P2P platforms.
As to whether institutional involvement should be welcomed, James pointed out that “broadening the supply of funds” was always on Funding Circle’s agenda.
Furthermore, there is no sign on any of the major platforms that individual lenders are being “crowded out” by banks or other organisations. Although P2P lending is growing at a terrific rate at the moment, its share of the UK’s credit market remains small and there is plenty of scope for further expansion.
The Today Programme had two further concerns to raise about P2P. The first was whether this credit model had ever been truly tested – could it cope, for example, in a downturn?
Zopa was set up in 2005, and although relatively small at the time, managed to weather the credit crunch and subsequent financial crisis, and emerge in decent shape. As Giles pointed out, the data the company managed to collect from this period would be invaluable in dealing with any future economic crises.
Finally, Simon highlighted recent issues surrounding crowdfunding, where certain companies seeking equity investments had allegedly been overvalued, or had failed to give potential backers a complete picture of their business.
It is quite common for crowdfunding and P2P lending to be lumped together given their superficial similarities. But as Giles pointed out, the information provided to lenders on a platform such as Zopa is as transparent as possible.
This is particularly the case given the recent agreement with AltFi data to open up the company’s loan book and make public details of borrowers’ credit profiles as well as historical returns.
Nonetheless, it is of course quite right that P2P lending receives this kind of scrutiny in the media. Ongoing independent analysis is an important and necessary part of its move into the mainstream.
*You can listen to the BBC Radio 4 interview here: it starts just before the 16-minute mark.