Peer-to-peer lending is not just offering consumers an alternative to high street loans and a way to grow their savings: it is also posing a serious threat to traditional banking.
Alternative lenders continue to shake up finance
This is according to research published recently by the University of Edinburgh. A survey of credit analysts carried out by its Business School found that around three-quarters expect alternative lenders to continue to shake up the world of finance, with mainstream banks the most likely to be threatened. One in five of those questioned said that P2P was a “big threat” to long-established lenders.
According to Jonathan Crook, director of the Business School’s credit research centre, traditional banks need to quickly work out how they are going to deal with this threat. “Traditional banks need to adapt to keep up with this new, nimble market – and fast,” he said. “In a market where a small difference to an interest rate can make all the difference in attracting a good customer’s business, banks that don’t push ahead with technological advancements in the way that newer challengers are, could really begin to suffer.”
Understanding the risks of P2P lending
But the Business School’s research – published as part of its recent Credit Risk and Credit Control conference – also revealed some disquiet among experts with regard to the potential dangers of P2P lending.
Roughly 20% said they were concerned that newer lenders could be more susceptible to fraud while just over a quarter thought that the controls imposed by alternative lenders were too lax – in other words, these providers were agreeing to lend to considerably more people than traditional banks and this had the potential to threaten financial stability in the their respective economies.
Credit concerns after 2008
Of course these are perfectly reasonable concerns: the financial crisis of 2008 was caused, at least partly, by credit having been too freely available – in particular in the US sub-prime mortgage market (although it was of course the major banks’ attempts to commodify these loans that magnified the problems in this sector and led to global financial meltdown).
Zopa’s push for regulation
As such, P2P platforms such as Zopa need to be clear that they are not taking unnecessary risks – both for their own health, and to reassure lenders that their money is being advanced in a responsible and sustainable manner.
This is why, here at Zopa, we have always pushed for formal regulation of the P2P sector by the relevant authorities and we welcome the fact that since April 2014, the Financial Conduct Authority (FCA) has been in charge of the regulatory framework for P2P lenders.
The P2PFA and transparency
FCA regulation enforces the minimum standards that lenders must adhere to – but the leading P2P platforms can and should go further. This is why Zopa and some – but not all – other P2P services are part of the P2P Finance Association.
The P2PFA stipulates that members demonstrate “high standards of credit risk and operational risk management” as well as provide “balanced and fair information to all customers”.
As such, Zopa has opened up its loan book to an analyst called AltFi Data: this allows customers to see who we lend to, what returns lenders actually receive and how long money is advanced for.
It is only natural that policymakers and the general public are still nervous about the risks posed by unfettered access to credit. But through transparency and effective regulation, the P2P loans sector is doing all it can to calm these concerns.