The P2P market…and the Battle of the Brands
Last week, Hargreaves Lansdown, the UK’s leading fund supermarket, announced it planned to set up its own peer-to-peer lending platform in order to grab itself a piece of the growing P2P market.
P2P crowd-lending platforms, which allow consumers to lend to borrowers in return for interest rates more attractive than the high street banks, have moved from niche to mainstream over the past couple of years. More than £1.2bn of UK loans were made last year alone.
So it’s not surprising this has caught the attention of the big financial institutions – not just because they want to get in on the action, but because this is a growing threat (albeit a small one) to their commercial lending and personal savings businesses.
The P2P offering from Hargreaves won’t launch until mid-2016 at the earliest, and initially it will be to existing customers only, but the company’s arrival is bound to have a significant impact on the market.
Given the scale of its business – it has assets of over £49bn – Hargreaves could very quickly become the biggest player in the UK P2P market.
But it’s unlikely to be the only new entrant to this burgeoning sector.
The fact the Financial Services Compensation Scheme (FSCS) doesn’t cover peer-to-peer lending won’t necessarily stop other major players from entering the market. Like some of the current P2P lenders, they have the ability to setup their own compensation schemes to reassure investors.
And there are two other factors that will have banks and investment companies taking a very serious look at this market.
Firstly, P2P is regulated by the Financial Conduct Authority (FCA), which does provide a layer (or a thin veneer, depending on your viewpoint) of protection for borrowers and consumers. Secondly, there are changes planned to the tax-efficient ISA wrapper that will enable investors to put money into P2P-based funds.
That ISA change won’t happen before 2016 – which just happens to be when Hargreaves’ offer is planned to go live – but when it comes it is bound to have a profound effect on the market by making the potential investment returns even greater.
As the peer-to-peer lending market grows and diversifies, there are bound to be winners and losers. Inevitably, some of the market players will fall by the wayside. And as with any business sector, brand strength will be a key factor deciding who succeeds and who fails.
It was almost a year ago that we said those P2P platforms that still want to be around once the market reaches maturity will need to have built strong brands. Given the growth over the past 12 months, that ‘maturity’ stage is rapidly approaching.
A Populus survey late last year found there was strong consumer interest in P2P platforms, but potential investors wanted more reassurances about the risks to their cash before they would take the plunge.
Awareness of P2P is certainly on the rise, but the providers still have a job to do in clearly explaining how it works, particularly as different platforms have different approaches to borrowing and lending (you can’t call it saving or investing, because technically you’re lending your money to someone else, in return for interest).
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?
Even the big players like Zopa and RateSetter need brand trust. That’s where the big financial institutions waiting in the wings have a big advantage – they have established brands and the PR and marketing budgets to match.
But even though the current P2P players have much smaller pockets, they still need to prioritise brand-building communications.
There’s a need not only to fully explain what they do and to make the case for peer-to-peer lending, but to increase their visibility in an increasing crowded marketplace. They should be focusing on how they can reach potential lenders (investors) and borrowers.
It should start with their websites, and how they communicate across social media. It should also extend to developing brand partnerships, which would help them to reach new audiences and build trust at the same time.
It would also be good to see more use of people and businesses who’ve benefited from investing or borrowing via P2P – for instance, case studies on the website and through social media channels.
With the P2P market predicted to double every six months for the foreseeable future, the potential rewards for the players with the strongest brands are clear.