Alex Gowar from leading p2p finance website RateSetter.com explains how consumers are waking up to the alternatives to traditional banking:
Another week, another blow for UK Savers. If it’s not a major banking scandal, it’s an announcement from the Bank of England that interest rates will remain at the current historic low of 0.5%. This week, data from MoneyFacts.co.uk showed that just 1 in 5 high street savings accounts will cover the costs of inflation. No wonder so few households even bother to save.
Looking through the MoveYourMoney blog I can see that I’m not alone in believing that consumer trust and confidence in traditional banking is currently being severely tested. In this context, it is perhaps unsurprising that we find ourselves in the midst of a personal finance revolution where consumers are increasingly on the lookout for viable alternatives to traditional high street banks, which show no interest in offering value.
At the heart of this revolution is peer-to-peer finance. For the uninitiated, peer-to-peer lending is simply banking without bankers: operators provide a marketplace in which consumer borrowers are matched up directly with savers looking for a better deal. Although peer-to-peer has been around since 2006, the last year has seen huge adoption as borrowers and savers increasingly hunt for better deals. This is recognition that there are credible alternatives available to savers that offer safe and highly competitive returns on hard earned cash. At RateSetter.com, savers can lend for as little as one month at an AER of 3.3%, up to a “5 Year Income” returning 7.2% after fees.
The thorn in peer-to-peer’s side has always been defaults– what happens if the person I am lending my money to cannot repay? The three main providers, RateSetter.com, Zopa and Funding Circle, have approached the issue of bad debt from different angles, though all undertake similar stringent credit checks to ensure only worthy borrowers are approved. RateSetter believes it has cracked the nut of bad debt via a unique ‘Provision Fund’. The Provision Fund is a pool of money from borrower fees which compensates lenders should a late payment, or default, occur. It gives legitimacy to RateSetter’s claim of being the simplest and safest peer-to-peer operator: in fact, RateSetter is the only peer-to-peer operator in the world to justifiably claim that every single lender has received every penny of capital and interest.
Commitment to protecting Savers is what led RateSetter, along with Zopa and Funding Circle to establish the P2P Finance Association. This self-regulatory trade body aims to protect consumers by promoting best practice within the sector. These guidelines can help forge a path to new regulation governing the sector, an issue that needs to be addressed if current growth continues. And there’s no reason to suggest that growth should slow, as economic commentators have recently been far more vocal in talking up peer-to-peer as an alternative to traditional banking systems. Indeed, Director of Financial Stability at the Bank of England Andy Haldane recently suggested that peer-to-peer finance companies could one day disrupt high street banks in the same way as the Googles of the world have changed the face of retail.
Will grand statements like these worry the big boys of banking? Probably not, they’ve got a lot on their plate at the moment. But in many ways peer-to-peer represents a return to old fashioned principles of banking that seem to have gone awry in recent years: a prudent approach to risk, putting customers first, and delivering great value. Food, perhaps, for thought.