P2P: Does every crowd have a silver lining?

  • Grasp the concepts of peer-to-peer lending and crowdfunding
  • Understand the risks involved for the consumer
  • Gain an understanding of their place in the lending and investment markets

There are plenty of other differences between the upstart P2P sector and its more established rival. Ms Dumeresque highlights operational disparities between P2P and bank lending. 

She says: “Unlike banks, we haven’t got this transformational change of timing on how long our risk is. We don’t take in short-term money and put it out long-term; actually [we] match lenders and borrowers who actually know each other.”

Mat Gazeley, PR manager at Folk2Folk, notes that although alternative finance organisations are fundamentally facing off against banks, an unlikely partnership is sometimes taking place. “We are competing with banks on other business services to fulfil one gap and one type of finance, and that’s where banks are seeing the advantage of partnering with alternative finance providers.”

Default risk

As with any new lending programme, the risk of default should be one of the key concerns for any investor considering an alternative finance vehicle. Data prepared by Oxera (see Table 1) for the Peer-to-Peer Finance Association provides an indication of the actual and expected losses during 2013 and 2014 for a number of the main P2P providers. In order to offset the risk of default and attract investors, platforms offer higher rates of interest, typically in excess of 5 per cent.

Chris Hancock, chief executive of platform Crowd2Fund, which offers the facility to invest in an Isa through crowdfunding, maintains that the higher rates are realistic. Mr Hancock says, “We’ve been going for two years and had zero per cent defaults. The (higher) APR is achievable because we don’t work with any institutions and that means the whole proposition is just for private investors. As some of the more established platforms work with big institutions, that skews some of the returns.”

Recent issues

However, the alternative finance sector has had other problems to deal with in the past few months, stifling growth rates that were previously surging. Investors became understandably cautious in the wake of the EU referendum result and developments across the Atlantic have heaped further pressure on the industry.

 “Since the summer there’s been the shock on the US lending platforms,” says Gonçalo de Vasconcelos, co-founder and chief executive of Crowdfunding platform, SyndicateRoom. 

This is in reference to the plight of LendingClub, founded in 2007 – a company known for pioneering the concept of P2P lending. In May, its chief executive, Renauld Laplanche, stepped down after an internal review uncovered sales of $22m (£18m) to a single private investor in violation of the firm’s business practices. The development caused LendingClub’s share price to halve in the space of two weeks, and, at the time of writing, shares remain around 25 per cent lower from their pre-scandal price. 


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