The year 2013 is proving to be a monumental year for peer-to-peer lending having passed the £500million mark of loans arranged, with lots of new companies launching or looking to launch within this space. Are these companies simply jumping on the bandwagon or are they bringing anything new ?
The UK peer-to-peer market is growing in excess of 100% per annum and this is increasing, so it is inevitable that this will attract a lot of attention from new businesses. I believe that only a few companies have simply jumped on the bandwagon as most are offering something new, or targeting a niche market. It is encouraging that companies are not afraid to try something new, and while not all of these will be successful, this is a good example of Darwinian evolution in a commercial context. It is likely in ten years time that most P2P companies will operate a similar business model, or operate in a specialist sector.
There are already certain aspects that new companies are offering by default, such as the provision fund pioneered by RateSetter, guarantees pioneered by Funding Circle, or secured lending pioneered by ThinCats. Zopa, the company that started peer-to-peer lending in 2005 has over the years offered a variety of lending models, but the one that is still used, and used elsewhere within the industry is the market model where multiple lenders are automatically matched to a single borrower.
In the UK the top 4 peer-to-peer companies (by outstanding loans) have over 95% of the this market (these comprise Zopa, Funding Circle, RateSetter and ThinCats). New companies are taking some market share, but these companies have to offer something to attract lenders and borrowers. A company with lots of potential lenders and no borrowers will be as equally unsuccessful as a company with no lenders and lots of potential borrowers, so marketing has to target these types individually.
New lenders would be attracted by a higher reward to risk ratio, lower fees and whereas new borrowers would be attracted by lower interest and lower fees. Peer-to-peer lending already has market leading rates for borrowers, but not every borrower will pass the high bar for credit checks. If P2P companies relax the requirements for borrowers it can have a severe negative impact on bad debt rates months or years down the line, and several companies have experienced this with disastrous consequences for lenders and the companies themselves.
The P2P money website is unique as it is the only site to publish comparable rates between companies and bad debts, so lenders and borrowers can choose the best company for them. The one bit of advise I can offer is that all new companies should be as open and honest as possible about bad debt estimates, lates (loans that are currently late), and defaults, as they will live or die by these statistics.
Funding Circle won the Alternative Lender of the Year (Commercial) and RateSetter the Alternative Lender of the Year (Consumer). This is further recognition that peer-to-peer lending is having a major impact in the finance, and is a driving force for better rates for both borrowers and lenders.
Zopa has launched a new feature to protect lenders from bad debt called "safeguard". Where a borrower is unable to repay their loan, the safeguard will step in. It is our understanding this will operate similar to the provision fund operated by RateSetter.
Safeguard is advantageous for lenders as it will give them more certainty of what their return will be. This will also reduce the tax that lenders would otherwise have to pay (as tax is paid before bad debt), but with safeguard Zopa will take over the loan and repay the lender any outstanding funds.
RateSetter's provision fund has been hugely popular, and it is expected that safeguard will be equally popular. The finer details of how the safeguard will be funded are still to be determined, and it should be stated that this is not a guarantee, but a further layer of protection for lenders.
Here is the full statement from Zopa:
Zopa today announced its new Safeguard tool to reward British savers, frustrated by low savings rates, with a better financial deal. UK savers will benefit from the new Zopa Safeguard which enables them to simply and safely earn market-leading returns of 5%.
Zopa hit a record £300m lent to UK consumers through its peer-to-peer lending platform and the total is growing daily. From the loans that have been approved since Zopa launched in May 2005, 45% of borrowers have been able to purchase a new car, 21% have been able to undertake home improvements and even 2% can cover their wedding expenses.
Zopa savers cut out banks and building societies and earn 5% on their savings by lending their money directly to other responsible people. Despite Zopa’s default rate being extremely low (0.8% on all money lent since launch), the Zopa Safeguard is now available to make up all the money owed from a borrower, including the interest, in the rare instance that they are unable to pay back their loan.
By rewarding people who are good with money, Zopa provides leading market rates for savers and borrowers. The new Zopa Safeguard tool will reassure savers that their money is protected and earning great returns.
Giles Andrews, CEO of Zopa said, “Zopa has lent over £300 million directly to UK consumers and has been rewarding customers that are good with their money by delivering great rates for the past eight years. With the launch of the Zopa Safeguard we are going even further to ensure savers get secure and market leading rates of over 5%. We have already seen a 200% uplift in savers signing up to Zopa in 2013 and with the financial sector experiencing a challenging time, this signals an exciting opportunity for us and future for the peer-to-peer industry.”
As the market leader in this sector, Zopa is spearheading the consumer choice that bypasses traditional financial institutions and provides a higher reward for being good with money. Adding Safeguard enables Zopa to further reward its customers and make the activity of lending-to-save more appealing and secure.
RateSetter, one of the clear leaders in the peer-to-peer sector, have announced that they will now offer secured loans. RateSetter already offer protection to lenders with their provision fund, and this simply would mean the provision fund would be able to recover funds through those assets.
More interesting is that these loans will be made through "chosen partners" rather than the RateSetter website initially.
Here is the full statement from RateSetter which is listed on their notice board:
On Monday, we are planning to issue RateSetter’s first secured loan. This is not a first in peer-to-peer lending, a number of other platforms already offer secured loans, but we believe it is something that will be valuable for our customers, on both sides, so we have taken the decision to put in place the infrastructure to do so.
From a Borrowers’ perspective, this means that they can borrow larger sums, while from a lender’s perspective, RateSetter’s “USP”, the Provision Fund will to work as normal: all Borrowers, whether secured or unsecured, will continue to pay a Credit Rate, only now the Fund will have the addition of an asset to recover.
We have sought to enter this market place with a clearly defined aim of what we are trying to achieve: to open our market to creditworthy Borrowers who are typical of the RateSetter profile and who want to borrow more money than they could with a conventional unsecured loan. These loans will not initially be available via the website, but through introductions from chosen partners, who have a demonstrable track record of understanding the markets they operate in and the credit within them. We continue to underwrite every application with the same rigour we have applied so far and believe that this new product will allow us to satisfy more potential RateSetter Borrowers.
For our lenders, the implications will be negligible: we have updated the Terms and Conditions to reflect that you are happy to lend via a secured contract as well as our normal unsecured contracts, but, as you would expect, we will administer all aspects of the security for you including holding it on your behalf. We will begin by taking security over property with strict valuation and loan to value criteria.