Fund Selector: P2P has stolen banks’ role

Fund Selector: P2P has stolen banks’ role

The recent spotlight on peer-to-peer (P2P) investing, not least the fallout from the LendingClub scandal in the US, has raised the question in some minds as to whether we should return to depositing our cash, or borrowing money from high street banks.

But it is worth remembering it costs a lot of money to service lending the old way and the regulators are making it increasingly difficult for banks to lend money, despite the fact that they say they want more lending.

The banking landscape has changed irrevocably. It costs a lot of money to administer banking functions. Outside of the UK, free banking disappeared years ago.

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As for those firms lending through these platforms, in the current market an investor would have to take a lot of risk to get the same level of return and their money back at the end of a few years.

Take a quick look at how P2P and banking differ. P2P and platform lending is investment, not a substitute for cash in the bank. You can lose your money. You are lending to an individual (or pools of companies or individuals) for a fixed sum, for a fixed period of time, and are being paid a rate of interest to compensate you for the risk of not getting it back until the term ends.

However, we need to be mindful that banks lend to companies and individuals, and that they receive interest from the borrower until the loan is repaid in full.

Platform lending is essentially allowing individuals to do the job that the banks used to do, with the P2P platforms – such as those to which we have exposure in our portfolios – replacing the middle man (the bank) with analysis tools to allow for an assessment of risk.

So where do we go from here? Is regulation of these platforms likely to increase? Probably, although while they simply sit as the middle man between the lender and lendee, I wonder what they will be able to hold capital against. Their balance sheets, after all, holds no loan assets.

The opportunity has been opened up because of advancements in technology that enable companies to assess the ability of individuals to service their loans. That means transparency of assets should be part of the package when dealing with these platforms.

Furthermore, one of the major issues with the current stimulatory efforts of central banks is that we have yet to see this quantitative easing cash actually find its way into the real economy. Instead, banks have tended to stash as much of this cash as they can.

Central banks want us to take risk and take our money out of banks so it can get into the real economy – it strikes me that platform lending is doing exactly that.

Nonetheless, P2P lending is not a one-stop solution. It should be considered as part of a broad, diversified portfolio and one that is still very much in its infancy. As with all investments, investors should carry out thorough due diligence before they get involved.