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.
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.
