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My peer-to-peer story
I was really looking forward to speaking at the P2P Finance Association conferance on Tuesday, but unfortunately the flu had other plans for me!
My peer-to-peer story began in 2005 when I read an article about a new website where you could lend direct to individuals who need a loan. You were the bank manager and you could set your own interest rate, per risk band.
Your money was spread to at least 20 borrowers, so if a single borrower defaults you won't have lost all of your capital.
Having invested in shares previously with various degrees of success, I thought this was a lower risk venture. At the time the minimum deposit was £500 which I though was a lot, but decided to give it a go.
My first loan went out in July 2005 and was repaid successfully without incident - which is what you would want it to be. Over time I lent more money through Zopa.
For a while Zopa was the only peer-to-peer company in the world, but in 2006 Prosper, a US based company, launched a different concept in peer-to-peer lending. Unlike Zopa which operated a market model, Prosper had a listing based system, where individuals could choose whether to lend to any individual and at what rate. These two competing models cover by far the majority of peer-to-peer systems today.
Zopa did launch their own listings model which was significantly different to the market model, and less checking was performed on the individuals, and ultimately this difference was the cause of its downfall as the bad debt rates for listings - where Zopa did not provide any estimates - were excessively large. A larger than expected proportion of my bad debts from Zopa were from listings.
My lending on Zopa was performing better than estimates until 2008 when bad debt spiked and then in 2010 when it became aparent that taxation should be paid before bad debt, despite Zopa's website showing returns after bad debt.
Competition to Zopa did not appear until 2010 when a company called YES-secure appeared, boasting a significantly larger IT team behind their business. YES-secure, like Propser, operated a listing style model. Unfortunately, bad debts quickly appeared and despite several rebranding excercises, YES-secure now trading as Encash now have less than £50k of loans outstanding. As a lender I did invest some funds, but subsequently sold all loan parts and withdrew all funds.
Peer-to-business appeared in 2010 with a new company called Funding Circle, but it actually started a year earlier with a much smaller company called BigCarrots. Funding Circle was the first serious competition to Zopa.
RateSetter also appeared within 2010, with the innovative provision fund which would cover bad debts, so lenders were not subject to the chance event of a default. This has proved popular with several later peer-to-peer companies offering something similar, and even Zopa launched their Safeguard which operates in a very similar way.
Zopa, RateSetter and Funding Circle are the three main peer-to-peer providers in the UK even today, and these are the three companies I have used the most. With new companies launching on a regular basis it is becomming harder to differentiate them from their competition, and there have been a number of failures over the years.
The most notewothly failure so far was a company called Quakle, also launching in 2010. This was one of the few peer-to-peer companies that I avoided completely as I didn't believe they had a viable business model. Quakle didn't initially perform credit checks, but relied on social trust. If person A knows and borrows from person B, then they are likely to repay. This unfortunatly was doomed to failure and bad debts quickly spiralled out of control. The company shut down their website less than a year later, and most lenders were left significantly out of pocket as there was no mechanism to continue to collect payments from borrowers.
My peer-to-peer story will continue as the returns have been significantly better than what would have been achieved within a fixed rate savings account, but the difference is continuing to reduce. With the introduction of regulation this year there will be a an in-rush of new funds and the interest rates will continue to fall.