By Matt Haycox
Last week, the Financial Conduct Authority released their interim feedback of their review of their crowdfunding and peer to peer lending rules. And it didn’t sound good.
Andrew Bailey, CEO of the Financial Conduct Authority (FCA), stated that “fast-moving, evolving” peer-to-peer (P2P) lending industry poses “some quite big challenges in terms of transparency and fairness.”
Following this the FCA announced that it’s looking at tightening up the P2P industry because of the potential for certain developing practices to harm consumers.
The regulator felt that the industry was moving to a place where consumers are likely to take on more risk under the false believe that their investments were safe. Another concern is that institutional investors may also be getting preferential treatment because they bring a lot more money to the platform, giving the platforms themselves more volume on which to generate fees.
For starters, it’s a £8.7 billion industry but it was invented by British company Zopa back in 2005. At face value the model appears quite simple. People using online platforms lend directly to other people or businesses cutting out the middleman, usually the bank. Investors get good rates of return and borrowers get quick access to cash.
It sounds great doesn’t it? But in a market that is evolving so fast, it can be difficult for consumers to compare one alternative lender model with another. At the same time, innovation creates more complex business models that expose both the consumer and the lender to greater risks.
The consumer has the ability to borrow vast sums of money that may be beyond their reach to pay back, and the lender may be carrying on business outside their original permissions.
In the race to innovate or disrupt, its easy to see how harmful practices can creep into an industry, mainly unintentionally.
When you use a peer-to-peer website to borrow, you’re not actually borrowing from the peer-to-peer provider. They arrange for their customers to borrow from each other, so your actual lender is one of the peer-to-peer website’s ‘savers’.
The interest you pay on the loan is the interest they receive on the money they invest, and as it’s their money, they decide on the type of borrower they would like to lend to, and at what rate. As such, they’re often getting a better return than if they’d put their money in a savings account.
In a new market that is disrupting traditional finance, there is no point advertising to consumers who are uninformed.
I strongly believe that many of the current alternative lenders are building brands through advertising, hoping to build market valuation so that investors can exit at high earnings with absolutely nor regard or understanding of the underlying business – lending!!
Education should form the foundation upon which any new and disruptive industry is built, not fancy advertising and the publishing of statistics that are fundamentally flawed.
Instead of throwing money into glossy adverts, I believe the best foundations are built by going back to the old days of lending when your bank manager knew you, your family, your business and your friends. They would never lend to someone unless they met them and got to know them personally. That’s my approach to lending.
Ok, I accept it isn’t possible to meet every customer for a £10k loan when you are doing hundreds of them a month, but sensible and sustainable lending is about a lot more than just computer algorithms – something many of today’s new lenders either ignore or simply don’t understand.
In the true spirit of crowdfunding, I believe that it’s vital to build a community where the participants learn from each other in addition to the education that is provided by the alternative lenders themselves. In this increasingly social era, investors can learn from each other and lenders can genuinely know their clients, rather than having to rely on information being fed to them by platforms or computer.
Built on these pillars, I believe that the firms I advise will stand out in the alternative lending industry. The industry will tighten up over time and I believe that leaders in this space will be those that embrace transparency, fairness, putting the customer first, and education.
Matt Haycox is an entrepreneur and consultant for Access Commercial Finance, which provides business finance solutions from £10k to £2million. For more information visit www.matt-haycox.com
