The oldest Peer-to-Peer (P2P) lender in the United Kingdom, Zopa, has recently applied for a banking license to gather retail deposits and funding. This move sheds greater light on the future of this once glamorous post-financial crisis innovation. With this license, Zopa will be allowed to offer a wider range of products such as credit cards and overdrafts, easing the financial burdens faced by P2P lenders today. However, is this just the beginning?
Until now, P2P lenders have promoted themselves as a way for customers to bypass conventional banks — claiming that, by cutting out the “middleman”, they can offer loans more efficiently while delivering higher interest rates to depositors.
However, savers and investors are, as a result, not covered by the Financial Services Compensation in the UK, which offers up to £75,000 for any defaults by the lending company. Currently, the P2P industry is doing well, with Funding Circle – one of the industry leaders – receiving £40m from the British Government to support small businesses amid concern over credit constraints because of Brexit.
These P2P companies are tasked to fill the “potential gaps” which have risen due to the increase in regulatory standards by the Financial Conduct Authority (FCA). In addition, the high rate of returns for investors has attracted the younger generation, who have placed their trust in the future of P2P.
Since its introduction in 2005, more than £10bn worth of loans has been lent out from the UK’s P2P lending sector itself, the largest in Europe.
However, as with all types of Fintech in the market today, P2P companies have been clamped down on by financial watchdogs. The City watchdog has recently written to numerous CEOs of these P2P companies to warn them of lending money to other lenders. As stated by the FCA, businesses borrowing or lending money must be authorised to do so, a key feature of the banking sector.
With the growing complexity of the sector, companies are not only constantly facing the challenge of attracting potential customers, but also answering to regulators over their supposed “boundaries”. In December last year, the FCA raised its main concern of “provision funds”.
These funds are used by these P2P companies to protect investors in the case of any bad loans to their customers. These loans currently offer a “sense of relief” for most investors, who believe their investments are extensively covered by these “provision funds”.
However, the FCA’s chief executive, Andrew Bailey, has instead warned of these “funds” being possibly misleading. The FCA is currently investigating the “risk of regulatory arbitrage” with high-street banks. The BoE has also informed banks and companies of tougher regulations in the future due to greater use of disruptive technology.
The Right Direction
The founders of P2P had set out to make a difference and show the mass affluent that there was an alternative to the traditional banks. The sector qualities must be retained if players are to avoid turning into ordinary financial institutions.
Back in August 2014, George Osborne announced that the UK was at the beginning of a new era of banking and highlighted the potential of peer-to-peer lending. This industry was built on being different from the values and practices of its high-street counterparts and therefore must continue to develop in this direction.
Even though P2P lenders may consistently face the challenge of attracting and retaining investors, it must not turn its back on its private investors. The world as it stands has enough banks already.