Is peer-to-peer lending a risk worth taking?

The P2P industry must do more to shake off an unjustified image of being too complex and risky for the everyday saver, says Andrew Hagger

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The Independent Online

There were a few eyebrows raised last week when the UK's second biggest mutual, Yorkshire building society, published its own guide to peer-to-peer lending together with some consumer research on the sector.

It found that one in 10 people would definitely take more risk with their savings to achieve a better return, while four in 10 admitted they would consider more risky investments depending on circumstances. The findings also showed that one in three target an annual return of 6 per cent over five years, so I guess it's not surprising that Yorkshire decided to take a little pre-emptive action.

There's no doubt that it is right to give customers some insight into P2P. However, having read the guide a couple of times, I can't help feeling that there's greater emphasis on the risks and less detail on the measures that providers actually take to protect lenders' money.

One of the biggest stumbling blocks for consumers is the wide range of peer-to-peer companies – from those dealing with personal lenders and borrowers, through to more specialist players dealing with complex commercial finance. They have different operating models, safeguard mechanisms and borrower types, so it's no surprise that consumers simply don't have enough confidence to invest.

More needs to be done to help customers and while the Yorkshire has raised the profile among its own members, the P2P industry must do more to shake off an unjustified image of being maybe a bit too complex and risky for the everyday saver.

Aside from the big names, if consumers take a look at the simple and straightforward websites of the likes of newer providers Lending Works and Landbay, they'll soon understand what P2P means. But as such a diverse industry, P2P as a whole is difficult for some to grasp.

With Funding Circle, RateSetter and Zopa having already lent a combined £2.26bn, it's no surprise that P2P is starting to be taken more seriously, and I see it as an compliment that a big financial institution has produced its own guide to an area of personal finance in which it doesn't operate.

Yes, P2P carries more risk than a standard savings account, but the regulator has ensured that all P2P providers make that crystal clear on all product information and marketing material.

The real issue is that consumers are fed up with getting a pittance on savings, with the Yorkshire proudly quoting an above-average industry savings rate of 1.6 per cent and 869 savings best-buy mentions in its 2014 annual results.

No doubt the billions of pounds invested in NS&I Pensioner Bonds took a bite out of bank and building society deposit balances, but at the same time it got us talking about the other, more rewarding options available.

There are differences between accounts offered by mainstream banks and building societies and the P2P players, but the contrast in returns on offer is significant and hence more people are prepared to take a calculated risk to earn 4, 5 and 6 per cent on some or all of their savings.

It's often said that P2P would disrupt the mainstream market and I think the move this week from Yorkshire building society is another sign that the big high-street incumbents are taking the sector more seriously.

Andrew Hagger is an independent personal finance analyst from moneycomms.co.uk

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