Jeff Salway: Banks face P2P challenge

Bank failures such as Northern Rock have caused resentment towards the industry, and helped P2P firms thrive. Photograph: Getty Images
Bank failures such as Northern Rock have caused resentment towards the industry, and helped P2P firms thrive. Photograph: Getty Images
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Regulation will boost peer-to-peer firms’ credibility says Jeff Salway

THE rise of the lenders that allow savers and borrowers to swerve past the high street banks is set to accelerate after they moved a step closer to entering the mainstream.

Peer-to-peer (P2P) lenders are to be formally regulated from April 2014, it was revealed last week, a shot in the arm for a sector that’s increasingly popular but hamstrung by questions of credibility.

The Treasury announced that the regulation of peer-to-peer firms will be transferred along with that of other consumer credit companies to the Financial Conduct Authority (FCA), which takes over from the Financial Services Authority in April.

The news sparked predictions of a fresh challenge to the high street banks. Others warn that it could backfire, however, with regulatory costs likely to make the rates offered to savers and borrowers on peer-to-peer sites less attractive.

The reality, as always, will lie somewhere in the middle. So why is this a big deal?

The answer lies in the rapid rise of P2P firms. These are online services, or platforms, that simply unite people wanting better returns on their cash with those seeking loans at affordable interest rates.

Savers can specify the interest rate at which they want to lend, the amount, the interest they want and the degree of risk they’re happy to take.

They get interest on their savings typically well above that offered by conventional savings providers, while borrowers access loans at cheaper terms than generally available from mainstream lenders.

The ability to cut out the middleman – high street lenders – has proved a hit over the past five years, as the firms have exploited resentment towards the banking industry.

The first big player to launch in the UK, seven years ago, was Zopa. It has been joined by firms such as RateSetter and consumer-to-business lending specialist Funding Circle.

The three firms, which self-regulate through the P2P Finance Association, have between them facilitated more than £400m in lending.

One firm, Quakle, collapsed a year ago under the weight of bad debts. Zopa, RateSetter and Funding Circle all point to low bad debt levels that owe much to rigorous assessment of would-be borrowers.

All three sites reject a large proportion of borrower applications while they also spread the money provided by individual lenders across a range of borrowers. Savers providing £500 of loan finance through Zopa have the money spread across at least 50 borrowers of specific risk categories.

Tim Moss, head of loans and debt at, said: “If you’re looking to borrow, don’t fall into the trap of thinking that a P2P lender is any different to a bank. The rates can be slightly cheaper than a mainstream bank, especially at lower loan amounts, but they still don’t accept people with anything but good credit scores.

So what will regulation mean for savers and borrowers? The word that crops up most is “credibility”. Formal regulation is viewed by some as endorsement of P2P lending, boosting the public perception of the sector, according to Andrew Hagger, of

“It’s good news for the main P2P players as it gives them great credibility. Consumers can see the industry being taken seriously by government,” he said.

The P2P Finance Association, unsurprisingly, agrees. Giles Andrews, its chairman, believes the regulation is the key to allowing P2P lenders to challenge mainstream banking. “Regulation should lead to increased trust among users. Consumers don’t always understand the details of regulation, but they will trust regulated entities more than those that aren’t regulated,” he said.

The other factor is the perception of security that regulation provides, regardless of the steps taken by some lenders in protecting customer money. As it stands, borrowers and lenders using P2P services don’t get the deposits guarantee enjoyed by bank and building society customers under the Financial Services Compensation Scheme.

There are drawbacks though, with regulation threatening to remove some of the competitive advantage enjoyed by P2P firms. The increased costs that come with compliance are likely to put new pressure on profit margins and therefore the rates offered to customers.

Go into it with your eyes open, said Moss, and you could benefit from very good returns on your cash.

But he added a more sober note too. “We are currently in times of uncertainty and consumers will be attracted to what are seen as safe places to save and borrow from, even though headline rates may not be as attractive.

“Until the mood of the nation changes, the mainstream banks will continue to dominate and P2P will remain niche.”

Twitter: @vaughansalway