The Bankwatch

Tracking the consumer evolution of financial services

Excellent Debate on P2P Lending across Blogs

If you are interested, there is an excellent debate on P2P Lending going on over a few blogs now. The general theme is whether P2P Lending (otherwise known as Social Lending) will make a difference to Banks.

It began here with this post at Zopa.

The problem is that unlike so many other far healthier industries, the banks have no effective competition. Microsoft is kept in check by Apple and increasingly Google. Warner, EMI and Sony are battling it out with the digital download phenomena. Tesco has to watch out for Sainsburys, M&S and Waitrose. Even the BBC has to keep something of an eye on ITV and Channel 4.

Banks don’t have the self-righting mechanism of genuine competition. It’s become a cosy club where customers are simply the supplier of money for banks to punt in their casino operations, politely called ‘investment banking’

Then James ex of Lloyds kicked in at Bankervision.

If Zopa were to have a material effect on bank lending, and its competitive differentiation is price, it will not win. It does not have pockets deep enough to win a price war with a major bank, let along the whole market. This much is simple market forces at play. The only reason this isn’t happening now is that, as Martin says, Zopa is not having a material effect on the market at present.

Then ‘always up for an argument’ Chris Skinner ratcheted up the volume here. [disclaimer – I am 100% with Chris on this one]

The real point is that, assuming there is a need for these new businesses which I believe there is, the only thing that undermines their business model is access to ongoing capital to get to the point of success. This is the challenge of any new business, and this is the real challenge to these new entrants: can they fund the business long enough to be successful?

Luckily there are plenty of financers out there who do believe in these new businesses however to fund them through their fledgling beginnings, including Red McCoombs for SmartyPig and Zopa’s investors range from Bessemer Venture Partners and Balderton Capital to the Rowland Family.

Even so, in Zopa’s case where they are creating a new market in P2P lending, the issue and challenge has always been getting enough people placing money into Zopa to enable them to meet the demands of those who want to borrow. Without funders, there is no marketplace.

So the challenge is to maintain investment and manage operating costs long enough during this start-up phase to get to the tipping point of growth. And, based upon a 40% increase in total loans just in the last year, maybe that tipping point has finally arrived.

And now the debate has made the FT blog

But what we at Money Matters want to know is whether UK individuals who have used Zopa have got a good deal. At the start of the year, Matthew Vincent wrote a piece about a new online auction site for fixed-term deposits – and although he found that online lending exchanges such as Zopa were offering higher rates of interest, he suggested that these rates could come down as the number of lenders using Zopa increased.

… and the House of Commons through Tom Watson MP blog.

I wrote to the Chancellor in front of me but essentially I suggested three things:

1. Change the tax regime so that people who make loans – investors – can aggregate their total ‘wins’ and ‘losses’ for the purposes of tax. So, if you make 10 loans and nine of them fail, you should be allowed to offset them again the tenth loan that made you money.
2. Consider allowing people to use P2P within their ISA allowances.
3. Bring P2P within the remit of the small loans guarantee scheme. It is this area that I think could have a great impact in the small business sector. If people are prepared to bet their own cash on a business, then they are likely to conduct as much, if not more due diligence on the company as any bank. And when the banks make silly, greedy, short term risk averse decisions, groups of small private investors can step in.

Relevance to Bankwatch:
Thats a lot of debate for something that doesn’t matter.

[another disclaimer; I am involved with CommunityLend in Canada, a P2P Lending company]

Written by Colin Henderson

August 24, 2009 at 20:14

3 Responses

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  1. Tom Watson is right about the tax issue but I think he’s wrong about the guarantee. It would be too easy to “game” and too expensive to police — besides, stopping people lending money from losing it is what got us into this mess! Just equalize the tax treatment and let the market evolve.

    Dave Birch

    August 25, 2009 at 01:40

  2. I’m not sure about that, Dave. A guarantee from a community of interest (what else is a credit union) of bilateral P2P credit may simply be backed by a “guarantee provision” made into a default fund held by a neutral custodian.

    With a bit of funding from Norway (where I am writing this – seeing a bank again tomorrow), I’ve been working on a new approach which distinguishes P2P credit and P2P investment.

    This article sets the differnt approaches succinctly

    http://www.policyinnovations.org/ideas/innovations/data/000085

    and this presentation in Norway went down well

    http://www.slideshare.net/ChrisJCook/money-30

    cjenscook

    August 25, 2009 at 05:01

  3. @Dave – agreed. The last thing we need is any form of artificiality within P2P Lending. Unfortunately I can forsee a day when politicians politicise it though. Even Bernanke mentioned P2P Lending back in June. It is beginning to get their attention.

    Colin Henderson

    August 25, 2009 at 22:52


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