Zopa to lend to small businesses

December 12th, 2012
Zopa

Following our earlier post we can confirm that Zopa will be extending its loans to encompass sole traders.  Zopa made the announcement on their blog this afternoon.  This is a new development that will move Zopa into the peer-to-business market.

Here is their brief statement:

We are pleased to announce that we will be taking part in the Government’s Business Finance Partnership scheme to help small businesses.

As part of this scheme, the Government will contribute up to £10million to help Zopa lend to small businesses over the coming years. We hope the additional money being lent through Zopa will help thousands of sole traders to further their business and help build the economy.

We’re really excited about this news and will be developing a process that is tailored for sole traders over the coming months – we’ll keep you posted.

Government to lend through P2P

December 12th, 2012
Funding Circle

The Guardian reported today that the UK government is to lend £30 million through two of the UK's leading peer-to-peer companies.  Funding Circle, the UK's leading peer-to-business provider will be allocated £20million.  Zopa, who today only offer non-business peer-to-peer loans, will be allocated £10million, as it is believed they will be extending their portfolio to include loans for sole traders.

This is great news for the peer-to-peer industry within the UK, and it shows that the government is taking it as a serious competition to banks.

Full story »

P2P Online Auctions: Waiting for the hammer to fall

December 10th, 2012

P2P Online Auctions: Waiting for the hammer to fall

Last week, FundingKnight saw its first loan auctions go live. Whilst we’d run test loans at fixed interest rates, this was the first time we’d given lenders a chance to bid to participate in an auction whilst choosing how much (from £25 upwards) and at what rate they wish to lend.

We’ve been looking forward to the launch of our live peer to business lending auctions. Auction models are generally considered to provide the best chance of generating value for both sides of the lending equation – the lender or investor and the borrowing or business that’s seeking finance.

Once the first bids had been successfully placed and we’d breathed a sigh of relief, it got me wondering about the whole psychology of auctions.

I’ve read many blogs, including this one by Seth Godin, about the irrationality of auctions.  The key points made usually go pretty much as follows:

  • Although it’s possible to set a maximum bid and walk away when bidding on an item on ebay most people don’t do that…
  • Instead they leave participation until the last moment and enter a bidding war with other buyers which has the potential to get increasingly ridiculous as buyers become attached to the idea of ‘winning’ the auction and owning the item they probably already think of as belonging to them.
  • Once they’ve won the auction they often sink into buyers remorse, thinking they’ve overpaid and wondering every other bidder managed to restrain themselves and drop out leaving them to pay over the odds for something they might not even want all that much anyway…

As Godin writes,

“A friend of mine spent almost a thousand dollars on a piece of furniture worth $20 using this tortured logic. Human beings are quite willing to repeatedly spend small amounts of money to avoid losing something they they think already belongs to them.”

So what does all this mean for peer to peer / peer to business lending?

Whilst the auction is a reverse auction – as more and more lenders bid, the rate the borrowers pays goes down – there must be a similar mentality at play, surely?

As luck would have it, I’m not the first to ask these questions. Several academic studies have already been run, such as this one that investigates Herding Behaviour in Online P2P Lending

The author’s set out to study lenders’ behavior in online P2P exchanges, investigating nine hypotheses, listed below.

To find out if they were right – and perhaps look a little deeper inside your own peer to peer lending mind – you can read the full report.  Alternatively, watch out for my summary coming later this week on the FundingKnight blog.

Hypotheses:

  • An auction with a higher participation rate attracts more bids.
  • There is a diminishing marginal effect of the participation rate.
  • Participation rate being equal, a newer auction attracts more bids.
  • An auction with more postings on the Q&A board attracts more bids.
  • An auction with more verified certification attracts more bids.
  • An auction with a higher starting interest rate attracts more bids.
  • An auction with a shorter payback period attracts more bids
  • An auction posted by a borrower with a history of more successfully funded auctions attracts more bids.
  • An auction posted by a borrower with a history of fewer failed auctions attracts more bids.

This post was written by Hazel McHugh who works for FundingKnight, a new peer to business lender who arrange crowdlending for businesses. It’s free to register for peer to business lending at www.fundingknight.com and you can start lending with just £25, fee free for lenders.

Why peer-to-peer should be regulated

December 8th, 2012

After the recent announcement that peer-to-peer lending is to be regulated, people may ask why an industry wants to be regulated.  Peer-to-peer lending has come a long way since 2005 when Zopa started the concept.  Lenders have been burnt several times by some of the peer-to-peer companies that followed, with Quakle being one example.  This company started arranging peer-to-peer loans in 2010 and ceased in 2011, when lenders found that the lifetime default rate was far more than ten times the estimated 3%.  Since then lenders have reported that payments have stopped completely and the company have not responded to emails.

With peer-to-peer lending the contract is (usually) between the borrower and the lender, so the loan is still valid even if the facilitator ceases to exist.  However with Quakle, as with most providers, lenders do not have the names and addresses of their borrowers so they may not know who to contact for their money.  It may not be cost effective trying to chase the repayments on a £10 loan.

Would regulation have prevented Quakle from failing ?  The answer to that question would be no, but regulation may have prevented Quakle from launching with such a flawed business model.  Regulation would (or should) have also ensured that procedures were put in place that would take over the servicing of existing loans after a company ceased trading.

Peer-to-peer lending carries risks; namely the risk that the borrower does not (or cannot) repay, and also that the peer-to-peer company facilitating the loan ceases to trade.  Regulation in itself probably won't address the first risk, although companies such as RateSetter have come up with an innovative solution to this.  However regulation should address the second risk, which is itself a lot harder for lenders to quantify.

Regulation should also be there to protect misleading or false information from being presented to consumers.  I myself have attempted to report several such incidents, but the various financial and advertising agencies have stated this is outside their remit.  A regulator would (or should) have far more power in this regard to take immediate action.

One of the reasons why P2P Money was created is to allow lenders to compare the various peer-to-peer providers and comparable interest rates after all deductions to make an informed decision on which company to use.  Regulation should allow lenders, and borrowers, to have greater confidence in the industry and prevent less scrupulous companies from operating within peer-to-peer lending.

Peer-to-peer to become regulated

December 7th, 2012
P2P Finance Association

The government has announced that peer-to-peer is to become a regulated activity in the latest Financial Servics Bill.  While other industries are resisting regulation, the leaders within the peer-to-peer industry, and consumers alike, have been pushing for greater government regulation.

This will help move peer-to-peer lending from what is sometimes regarded as a niche and unregulated activity to something that is a lot more mainstream.  At a time when peer-to-peer lending is growing at around 70% per annum, with other financial services activity flat, we welcome this news and look forward to having an input in this process.

 

Comment from the Peer-to-Peer Finance Association who represent 95.5% of the industry:

Following the Government's announcement this morning at the Peer-to-Peer Finance Policy Conference in London that it plans to regulate P2P lending, the Peer-to-Peer Finance Association has issued the following statement:

“This news represents a watershed moment for peer-to-peer lending. The Peer-to-Peer Finance Association has provided clarity and protection for consumers and businesses, but we have always strongly believed that introducing proportionate regulation was necessary to enable the sector to continue to flourish. We are committed to working closely with the Government and the Financial Conduct Authority over the coming months to build the right framework for our future.”

Comment from Funding Circle:

Responding to news today that the Government plans to include the regulation of peer-to-peer lending within the Financial Services Bill, Samir Desai, CEO and co-founder of Funding Circle said:

“We welcome this announcement and look forward to working closely with the Government and the Financial Conduct Authority over the coming months to help build a regulatory blueprint”.

“The economy continues to face some very tough times, but peer-to-peer lending has prospered over the last two years and established itself as the credible alternative to the banks.”

“At a time when bank lending continues to remain flat, Funding Circle is helping thousands of British people to earn inflation-beating returns by lending money directly to growing businesses fizzing with ideas, energy and ambition”.

The Government’s decision to introduce formal regulation is another example of the progress of peer-to-peer lending. Since Funding Circle launched in August 2010, peer-to-peer lending has more than tripled.

Funding Circle is the UK’s largest online marketplace where people directly lend money to small businesses in the UK. Since launching, more than 20,000 British people have joined, helping to lend approximately £65 million to businesses. Funding Circle is now helping to lend approximately £7 million a month to businesses.

Comment from RateSetter:

We believe the decision to give peer-to-peer a regulatory framework is a good one. It is what we at RateSetter, together with the Peer to Peer Finance Association, have been calling for. It vindicates our decision to work together as an industry and voluntarily pursue a code of self-regulation and it sends a signal that the Government recognises the growing relevance and scale of peer-to-peer.

The regulator's mandate is to ensure regulated firms conduct themselves in the right manner and to offer appropriate protection to consumers - we at RateSetter would like to think we have acted in that spirit from the day we set up. The regulator will have a new mandate as well: to promote competition. Given this focus on competition, it is no surprise that the Government welcomes peer-to-peer which is bringing fresh choice for consumers and businesses.

The process starts from here. Over the next 18 months there will be a consultation period and engagement between the industry and the law-makers. The Government has emphasized that regulation should be proportionate - there to give appropriate protection, not to stifle. We at RateSetter look forward to working with the regulator and hope this signal of support from the Government gives the many thousands of RateSetters increased confidence in the future of peer-to-peer.

Comment from FundingKnight:

FundingKnight has been talking to the FSA for several months and is well advanced with its application to become FSA regulated for those parts of its activity that fall within the FSA’s regime.

Rather than simply campaign for regulation, FundingKnight took the view that some of P2Ps current processes already fell within the regulatory regime and applied on that basis.  We hope to be the first regulated P2P Lender.

FundingKnight CEO, Graeme Marshall, commented:

“FundingKnight welcomes the prospect of regulation of crowdlending / peer to business lending.  It may be that the news this week relates more to pure peer to peer lending and the extraordinary rates that are being charged to some individual borrowers but, regardless, some clarification and rules would be welcome.

Whereas FundingKnight believes that although matching lenders with business borrowers does not in itself fall to be regulated under the current rules, there are many peripheral activities that are less clear and so Government clarification and regulation would be welcomed.  This will also assist with the setting of standards for this new and exciting activity.  FundingKnight is seeking authorization for those of its activities that are covered by the Financial Services Authority.

FundingKnight has a team well experienced in financial markets who collectively believe that regulation of this industry will help crowdlending to become recognized as a new model for lenders and borrowers to be matched, using the power of an online marketplace.  We look forward to participating fully in discussions with the FSA and Treasury concerning forthcoming regulation.”

Whilst we’re not claiming that our discussions with the FSA prompted the Treasury’s response, we’re glad to see that the move towards regulation is now gaining momentum.