Whether we in the industry like it or not, peer-to-peer lending has for some time been lumped together with the likes of hedge funds, offbeat types of investment vehicles and even payday lenders in what is known as the “shadow banking sector”.
This term was originally designed to cover those entities outside the regular banking system which were in the business of extending credit – and P2P certainly fits this definition.
In the wake of the credit crunch and the global financial crisis, regulators were understandably worried about what other sources of systemic risk might have been overlooked. As a result, the Bank of England and its counterparts overseas have made it clear that shadow banking should and will come under greater scrutiny.
One might see a certain irony in the fact that those institutions which were actually responsible for the meltdown in 2008 are by implication defined as “non-shadow banks” – particularly when it was the opacity and complexity of their disastrous multi-billion-dollar derivative trades and poor credit risk management that brought the financial system to its knees.
But my aim here is not to go over old ground. Rather, I want to make the point that the activities of the P2P lender that I helped set up, Zopa, are as far from shadowy as the most diligent regulator could hope for. A founding principle of P2P lending is to ensure that platforms are open and transparent about lending.
When Zopa became the first P2P platform to launch in 2005, we knew that persuading consumers to trust us with their cash was crucial to our business. This meant being a transparent and responsible lender from the start, extending credit to “super-prime” borrowers and building a risk function robust enough to withstand the seismic economic shocks that came along a few years later.
More recently, Zopa has become one of a handful of platforms to open up their loan books and provide loan data – to the public and analyst AltFi Data. Anyone can now see exactly what returns we have been able to offer customers over the past decade, and at what level of risk.
Furthermore, P2P lending is perhaps the only part of the banking industry that has actively lobbied for greater regulation – again, we see FCA oversight as vital in fostering consumer confidence in the sector.
There is every indication now that P2P has emerged from the shadows: figures from the Peer-to-Peer Finance Association show that more than £459m was lent in the first quarter of 2015, an increase of almost a third on the final three months of 2014. Zopa itself should see its lifetime lending break through the £1bn barrier in the summer.
Meanwhile, the Treasury has indicated that a new third type of Isa, devoted solely to P2P lending, is likely to be given the green light later this year, providing a mainstream platform for our industry.
But whatever labels are attached to our sector, the fact is that the mainstream banks are nowhere near regaining the trust they lost in 2007-08, and consumers are increasingly of the view that P2P offers a much brighter and more transparent alternative. One where no shadows exist at all.