P2P lending and crowdfunding firms want to shed the alternative tag. But banks are hovering and tougher regulation is on the horizon.Craig Rickman reports.
The global financial crisis in 2008 was a stark reminder that reckless lending activities can have disastrous effects on individual economies. The way people borrow and lend money is changing at a rapid pace as a result. Whether lessons have been learned is another matter.
Domestically, two connected factors have driven this change. UK interest rates were slashed from 5 per cent to 0.5 per cent in the aftermath of the crisis in an attempt to stimulate the economy, and the base rate is now an even-lower 0.25 per cent following the Bank of England’s post-Brexit move in August.
But at the same time regulators have sought to clamp down on a banking industry held responsible for the economic slump. This has resulted in the sector being unable to exercise the same kind of lending power as it did pre-crisis.
This crackdown, coupled with the scarcity of income streams in the low interest rate era, has opened up an opportunity to reach out to small businesses via the introduction of a new type of middleman. Peer-to-Peer (P2P) lending and crowdfunding seeks to meet the need of small firms that need to borrow while also aiding investors looking at alternative methods of producing income or growth.
As a result, this kind of lending – which enables individuals and businesses to lend to peers through online portals – has seen a surge in investment volumes in recent years.
Banks, previously dismissive of the P2P idea and its credibility, are now starting to see its worth – as both a threat and an opportunity. But is alternative finance best left to experienced specialists, or can the industry become a key consideration for retail financial planning?
“[P2P] is moving from being alternative to very much mainstream,” says Jane Dumeresque, chief executive at rural P2P finance company, Folk2Folk.
“The Bank of England is trying to push money into the SME sector through the banks, to get there.”
This concept of moving from a niche offering to a conventional investment is the key objective for the entire sector; in this regard, competitors are pulling together. As elsewhere in life, the alternative badge is worn with pride by certain areas of the investment industry keen to offer a substitute to well-worn bond and equity offerings.
But the aim for alternative finance is to transform the sector into becoming a high street investment proposition. This has been aided by developments such as the April 2016 launch of the Innovative Finance Isa, designed as a home for such investments.
Bank on it
As the personal finance industry continues to expand its ambitions, the consensus seems to be that technological improvements are largely positive.
An alternative view is that the relationship and personalised side of conducting financial business has waned as technology has developed, therefore creating a largely faceless industry. For some larger institutions – not least banks – this has led to a pause in the pace of change, or even a business model rethink, as customer calls for a more personalised service grow louder. In this regard, consumers appear to favour technological progress for some of their financial affairs, but not others.