Time p2p lenders stepped into the spotlight
In just over a week’s time, the peer-to-peer (p2p) lending market will welcome a high-profile new arrival, in the shape of City “superwoman” Nicola Horlick.
Horlick – who made her name running big investment funds – is getting plenty of media attention ahead of her launch of Money & Co, which will give individuals the opportunity to lend money to businesses and make estimated returns of 7% after fees.
Given that banks and building societies are struggling to offer savers even 3% on their cash, that’s a pretty big and attractive carrot.
The peer-to-peer business lending – also known as “crowdfunding” – market in the UK has certainly grown rapidly over the past few years, thanks to players such as Zopa, RateSetter, Funding Circle and Rebuildingsociety.com. Industry figures suggest the market grew by 121% last year and is now worth almost £200m a year (a further £287m has gone in p2p consumer loans).
The market has given SMEs access to funds that have been hard to come by via more traditional lending sources, and given savers potential returns that only the equity markets can match.
But, according to a survey published by uSwitch.com this week, most savers (84%) still wouldn’t consider putting any of their money into the p2p market. In fact, it’s estimated that only two per cent have lent money (ie invested) via a p2p platform.
A major barrier to investing is the current lack of protection from either the Financial Services Compensation Scheme (FSCS) or the Financial Conduct Authority. The FCA – which published a report last year that criticised p2p lenders for “misleading and potentially unfair comparisons” – will oversee the industry from April, but whether that will be enough to reassure Joe Public remains to be seen.
The p2p industry argues that FCA regulation will provide that much-needed reassurance to investors, and its credibility has been helped by the fact the Government, through the British Business Bank, has already invested £20m in small businesses through Funding Circle, and this week pledged a further £40m of funds.
But if they are to appeal to the mass market of interest-starved individuals, not just risk-takers and experienced bankers, the peer-to-peer lenders need more than the FCA stamp of approval. They need to get better at explaining what they do.
Promoting the potentially attractive returns is pointless if people don’t know where their money goes (a reason for not investing cited by one in four people in the uSwitch survey) or what the potential risks are.
Ahead of the FCA’s stewardship, some of the big players (like Zopa), are trying to make investing look less risky and more “traditional”, with options that are akin to fixed-rate savings accounts, and with built-in protection against businesses not paying back their loans.
Some lenders have focused on making their websites as consumer-friendly as possible – quirky logos, cartoon characters and basic video explanations – but I’ve yet to find a p2p site that clearly explains this form of lending. And the website of trade body the P2P Finance Association is hardly enlightening.
But even if you do get to grips with the principles of how peer-to-peer lending works, choosing a lender isn’t straightforward. Because every lender operates in a slightly different way (even the descriptions of individuals vary from ‘investors’ to ‘lenders’), comparing one against another is tricky.
That’s why building brand trust is key.
A survey by PwC said only 15 per cent of Brits had heard of any of the big p2p firms, compared to 98 per cent who’d heard of the main banks. Would you invest your money in a brand you’d never heard of?
As the market grows – and while bank rates remain low – more players will come in, looking to take advantage. Those lenders who still want to be around once the market reaches maturity will need to have built strong brands, as Wonga has done in short-term loans.
The big players need to be on the front foot, positioning themselves as credible and safe alternatives to banks (which are still tackling reputation issues). There’s a major opportunity to increase their visibility, make the case for peer-to-peer lending and use key influencers – such as financial services commentators, business organisations and even their own customers – to reach potential lenders/investors and borrowers. If this really is the “year of crowdfunding”, you don’t want to be left behind.