Money Insider: Peer-to-peer lending gathers pace as faith in banks falters


Many people doubted whether peer-to-peer lending would ever really gain a foothold in the UK; however, the sector appears to be going from strength to strength and is increasingly accepted as a credible alternative to the banks.

This new breed of finance is still in its infancy with Zopa, the UK's first peer-to-peer lender, still less than eight years old.

A lack of confidence in the UK banking sector since the credit crisis combined with high borrowing rates and low savings returns has seen the peer-to-peer market flourish, with new providers entering the industry in the last couple of years.

Zopa remains by far the biggest player, and to date has arranged more than £200m in loans, including a monthly record of 1,621 loans totalling £8m in July alone – up by 72 per cent on the same period last year.

A more recent player on the peer-to-peer scene, and acting as the middleman for individual savers and borrowers, is Ratesetter. Launched in October 2010, to date it has already lent more than £30m. This year has seen a major increase in demand for loans with applications for funds currently running at about £1m a day and business levels up 45 per cent on 2011.

Along with Zopa and Funding Circle, Ratesetter formed the Peer2Peer Finance Association, a UK trade body set up to ensure that the sector maintains high minimum standards of protection for consumers and small business customers.

The peer-to-peer market is not solely aimed at personal customers, and with banks tightening credit policy and reportedly increasingly reluctant to lend to small and medium enterprises (SMEs), we've seen the emergence of a new type of business lender, such as Funding Circle and Crowdcube.

Funding Circle has lent more than £49.3m to businesses since it launched in 2010, with the average loan at around £39,000. The company pools the savings of investors, who have averaged returns in excess of 8.3 per cent, while the current bad debt is just 0.3 per cent.

Consumers shouldn't see this alternative banking concept as a soft touch, as strict credit-scoring criteria is absolutely vital to ensure defaults are kept to a minimum to give people confidence to continue to deposit their savings with peer-to-peer companies.

Ratesetter, for example, recently stated that only 10 to 15 per cent of loan applications are approved, so if you don't have an excellent credit profile you're going to have to seek your finance elsewhere.

One of the main concerns for people depositing their cash with peer-to-peer providers is that although the returns far outweigh those paid by the banks, they don't offer the cast-iron guarantee to savers that bank customers enjoy under the Financial Services Compensation Scheme.

There is still an element of risk, albeit small, that you don't have with a bank or building society. As long as you are comfortable with this, the lower overheads of not having to run a nationwide network of branches, means you can obtain better returns on your cash in the peer-to-peer market.

Providers have their own methods of trying to mitigate the risk to depositors. Zopa for example, will spread your money among a wide range of borrowers, while Ratesetter adopts a different approach by operating a "provision fund" which is built up from borrower fees, and reimburses lenders in the case of late payment or default.

Co-op's tough call on bankrupts

This week, the Co-operative Bank announced that it will no longer allow undischarged bankrupts to open a basic account.

Until Monday, the Co-op, along with Barclays, was one of only two banks which gave bankrupts access to basic facilities.

However, with the rest of the industry failing to play a part in this unprofitable market segment and no response from the Treasury Select Committee to requests for a review of the situation, the Co-op felt it had no alternative but to pull out of the market.

With some 55,000 new, undischarged bankrupts every year, the Government needs to ensure that all existing and new banks play a full and active part in the basic banking market.

Let's hope this shot across the bows on the part of the Co-op will be the catalyst to get key players round the table.

Andrew Hagger is an independent personal finance analyst from

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