Posted by Jill Kerby on September 30 2014 @ 09:00
IS PEER TO PEER LENDING THE REAL THING…OR JUST A GLITCH IN A FIXED MARKET?
My son can’t understand why I don’t bother to use apps that he insists will make my life easier. He is flabbergasted that I sometimes forget to juice up my mobile phone. Or that I sometimes ignore it completely.
His eyes roll when I tell him I was an Amstrad user who had second thoughts to switching to a Windows driven PC. (I eventually opted for a Windows-friendlier Apple.) I even I thought Twitter was a nonsense the first year it came out. Now I am utterly hooked @jillkerby.
But I’m no Luddite. I’ve just been a little slow at times to acknowledge and adopt technological changes that have improved the way I’ve plied my trade: from manual to electric typewriter; from word processor to desktop, laptop and tablet via telex, fax, internet-enabled Facebook, Twitter and yes, apps.
Like millions of others – including other worried print-based journalists – I read more papers on-line than I buy. I seldom watch network television anymore. News and entertainment programmes stream to my tablet via the RTE and BBC Players, Netflix and Amazon.
I can’t remember the last time I was in a bank branch – all my banking is done on-line and I know that medical software programmes, apps and simple over the counter home diagnostic tools exist now that can diagnose ailments more efficiently, accurately and quickly than my family doctor or even an experienced consultant. The same programmes will then identify the appropriate treatment centre, book you in for treatment and even pre-clear the cost with a private insurer.
Try and beat that service, Doc Martin.
Industry after industry has been transformed by technology during my son’s short lifetime, let alone mine. Who ever imagined the swift demise not just of the great Kodak corporation but the very nature of camera’s and video technology? let
(The ubiquitous mobile phone alone has replaced any number of pieces of technology that we once “couldn’t live without” – cameras, watches, calculators, land-lines, fax machines, PCs, TVs…)
And now it’s the turn of the retail banking.
In the space of just a few years, virtual currencies, crowd-sourcing and peer to peer lending (P2P) are threatening the powerful, global finance industry as they harness the power of mobile technology and social media and grow exponentially.
The power of direct, on-line capital sourcing is revolutionary. Everyone in business should be investigating how it could advance their business, no matter how small.
In an economy like ours that is still starved of capital, where profit margins (outside of tracker mortgages) are high and where thanks to the ECB’s promise to support the euro “at whatever cost”, they can borrow from each other at 10-12 times less than they charge their own business customers, is it any wonder that hard-pressed borrowers are increasingly tempted to by-pass them?
Business crowd-funding and P2P lending are the children of the noughties tech boom, but have come into their own since the great crash of 2008.
Nature abhors a vacuum. When bank lending came to a shuddering stop in 2009 it didn’t take long for word – on-line - to circulate that enterprising middlemen with banking and high-tech skills were setting up companies that would help everyone from charities and co-ops, dreamers and entrepreneurs, high risk start-ups and established, cash-starved small businesses, to by-pass the banks and instead find willing, private lenders directly.
Ireland has come a bit later to the party, compared to the UK and America where crowd funding and P2P lending – which is still not permitted in America - has raised billions.
Kickstarter, one of the best-known crowd-funders has raised over a billion dollars of finance in the US and UK from nearly 70,000 people for over 65,000 businesses and intends to set up an Irish operation.
So far crowd funding operations (like Fund It) has focussed mainly on charitable and social projects in which money (usually not more than six figures) are raised from hundreds or even thousands of small individual donations. It also raises repayable seed capital for start-ups but the downside risk is high and the survival rate (and repayment) rate is low.
Peer to peer lending, meanwhile, is the commercial flip side of crowd-sourcing. The largest player, Linked Finance set up 18 months ago and by last summer, had raised about €4 million for borrowers. The average sized loan has been in the region of €28,000, is repayable over a three year term and most borrower repay as 190 small lenders.
The winning lenders, who cannot stake more than €2,000 per loan, (an important risk control measure say Linked Finance) receive average gross interest payments of 8.9% or 7.7% once Linked Finance deduct their fee of 1.2%. (Borrowers also pay the intermediary a small percentage of their loan.)
Peer to peer lending can be a win-win for both parties – so long as the borrowers, who must be the owner of a small business, a sole trader or in a partnership, honour their 36 annual repayments.
Not only does P2P result in cheaper loans (the typical unsecured bankloan rate ranges from 9.5% and 13%) borrowers report that the process is much faster and more transparent. Since they often borrow from their own communities and customers, some admit that they feel a greater moral obligation to repay not just the money but also the trust of that community.
For lenders, the loan auction means a higher return on their bank deposit or savings. They face a lower tax bill too – all bank yields automatically deduct 41-44% annually.
Their downside is the higher risk they take. Someone who has lent €10,000 to five or ten different borrowers is still facing ‘concentration’ risk as well as the default risk that comes with unsecured lending. No Linked Finance loans have failed yet says the company, “but they will” and small lenders have to exercise caution.
Peer to peer lenders like Linked Finance undertake credit and directors checks and post as much information about the borrower as is available. But they don’t provide risk rankings; that final assessment is the responsibility of the lender before they enter the auction and in determining the interest rate they want.
Lenders who set their target interest too high will not win the debt and will lose the auction to someone who is prepared to accept a lower rate from the borrower.
The Wild West
Peer to peer lending has been described as the ‘Wild West of banking’ – new, brash, unregulated: capitalism at its purest as it links willing borrowers and lenders sellers in an unfettered marketplace.
Back in the heavily regulated banking market, where interest rates and the supply of money is constantly manipulated by politicians, central bankers and the parallel investment banking sector, P2P lending is causing some panic.
In the United States regulators have so far protected the vested interests of conventional banks by determining that no such direct lending is possible without regulation…which is not forthcoming.
In the UK, the intermediaries themselves are subject to regulation (a good thing) but P2P lending remains unrestricted. Is it any wonder it has caught the eye of hedge fund, private equity managers and even investment banks which see opportunities to profit from a market that the conventional banks have stopped servicing?
Technology will keep lowering the cost of crowd-funding and P2P lending. It will widen access to more players. But will these savings be enough if States step over-regulate, over-tax and overburden the players?
Who knows? But with vultures and vampires already soaring overhead, early birds might want to check out that P2P worm …while it’s still wriggling and for the taking.