Imagine there's no peers, no institutions too
It’s easy if you try – and p2p lending is better when it’s between people
When people lend money directly to each other, without a bank in the middle, the people that need to borrow and those that want to save both get a better deal. Sounds logical and also quite familiar, right? That is because this is the core principle of p2p lending which was explained to customers by firms that are now successful household names, like Ratesetter and Zopa, beginning in 2006 when they started offering people in the UK a better financial future. Control, transparency, and a better deal for ordinary people were all now possible, because these platforms helped connect real people that needed a loan with real people that had money to lend them. It was simple, straightforward and given the rapid growth of p2p lending in the UK, people were clearly drawn to the promise of a better future without the need large multinational banks. Organisations that often struggle with inefficiencies and lack transparency. Yet somewhere along the way, what should be called people to people lending became peer-2-peer lending. Moreover, many larger platforms are perhaps becoming more interested in attracting large institutional investors to fuel their growth, than in continuing to innovate for the benefit of the everyday working John Smith. It turns out that institutions have really developed a taste for p2p lending. In fact, investment by professional institutions now accounts for more than half of the entire p2p market, up from just 10% 3 years ago. Again, while institutional investment in p2p lending is not inherently a bad thing, any negative impact on the UK’s p2p lending market is likely to be felt more by individuals, than the institutional investors that are now getting involved. The rapid growth of p2p lending platforms powered by institutional investors has likely played a role in the shift amongst UK platforms from auction based lending to automated lending. The vast majority of large platforms in the UK now operate automated lending platforms. This model of p2p lending means that individuals invest their money on a p2p lending platform, who then distribute it for them across multiple loans and borrowers. The money still goes directly from ‘peer to peer’, without the need for a bank and in a very efficient manner, but it is arguably less transparent than the auction based model operated by firms outside of the UK. In the auction based model of p2p lending, people can specifically choose who they want to lend their money to. Investors can also set the interest rate for the loan and actually interact directly with the borrower to better assess the risks. This is a truly transparent form of ‘people to people’ lending, which is powered by a community, auctions where buyers and sellers can chat and agree on the terms of a loan directly and where individuals clearly benefit the most, like at Zltý Melón in Slovakia. You may not have noticed this shift, even if you consider yourself an active p2p investor and advocate of the FinTech revolution. For me this was definitely the case, and I worked for a FinTech startup where I lived and breathed the excitement of the p2p revolution. In fact, it wasn’t until I left the FinTech hub of London and moved to Bratislava that I had the benefit of a perspective unclouded by the FinTech IPO hysteria. Something driven by the mutual backslapping between the Armani clad investment bankers of Canary Wharf and the t-shirt wearing CEOs of Silicon Valley Roundabout. The irony of this wardrobe discrepancy is that for me, the state of p2p lending in the UK could soon become a case of the Emperor’s new clothes. While p2p lending is still more profitable, more transparent and a better deal for consumers than what they have traditionally been offered by the major banks. Models that build and capitalise on the most innovative principles of the sector that have enabled it to disrupt the traditional financial sector as much as it has in recent years. It is important that it stays this way. You see, you don’t need to imagine a world in which p2p lending is not just better and more transparent than traditional banks, but is truly a better future for ordinary people. It already exists! So as John Lennon would say: We hope someday you will join us, and the world will lend as one… ;-)
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