Why P2P lending is getting ever more robust – and why Adair Turner is wrong about the industry

Harriet Green
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Now is the time for greater collaboration between P2P platforms and banks – a good thing for everyone (Source: Getty)

Former Financial Services Authority chairman Adair Turner took a potshot at the P2P lending industry yesterday, stating that “the losses which will emerge from peer-to-peer lending over the next five to 10 years will make the bankers look like lending geniuses”. More specifically, he expressed his concern at the credit checking P2P and debt-base crowdfunding platforms perform.

I caught up with Angus Dent, chief executive of platform ArchOver, to talk about the remarks, along with what he thinks the future holds for the sector.

ArchOver, which was founded in 2014, has worked to create as much security as possible for investors by offering secured and insured lending. All loans are secured against a businesses’ account receivables, and ArchOver goes a step further by insuring the invoices. The platform also offers a secondary market, enabling investors to sell loan parts as and when they need to.

What did you make of Lord Turner’s remarks?

Well, he certainly knows how to grab a headline! Speaking with all the authority of someone who knows a thing or two about disasters – he presided over one himself as the former head of the disastrous and now defunct FSA – he is now predicting that the P2P crowdlending market is destined to come to grief because of poor credit risk processes that are indigenous to the sector.

The first thing to point out is that, in terms of size, the UK’s P2P lending market is, for all its success, minuscule compared to the size of the whole market place; the major banks still control 90 per cent of lending to SMEs. The second point is that the credit risk processes in P2P lending are at least as thorough as they are with the majority of the banks. Indeed, many individuals in the P2P sector used to work for banks in the days when they actually lent money to SMEs.

In ArchOver’s case, the process is actually far tougher because borrowers over our platform are obliged to cover their loan against default through credit insurance. No bank that I know does that as a matter of strict policy.

However, more important still is the fact that all P2P loans are matched – they have a set duration at a fixed rate agreed between borrowers and lenders. The only thing that can change is the borrower repaying early. This sort of arrangement is in direct contrast to the banks which “borrowed short and lent long” – precisely the toxic combination that led to liquidity problems and contributed hugely to the banking crisis.

Criticism is one thing, but scaremongering on this scale, especially from someone who should know better, is neither appropriate nor helpful. It is made worse by a blatant distortion of the facts.

You offer rolling security – as borrowers pay, new loans are issued and secured against new invoices. What problems associated with traditional invoice financing do you solve?

If you look at the traditional ways of invoice financing, the first problem is the amount of work it generates – lots of firms have to employ someone just to manage the relationship with the invoice discounter. Businesses often aren’t sure how much they’re going to get from discounters, because the latter reserve the right to change the amount of an advance on a day-to-day basis. With credit insurance, once the limit is agreed, it’s fixed for 12 months. That creates certainty for a business – and we know uncertainty limits your ability to plan.

And the cost goes further. Discounters quote you a rate of interest, but then every time something happens – a late customer payment, a credit note – there’s an added charge. That makes the discounters’ fees very high – up to 18-20 per cent, like a credit card almost. Of course, it’s fine to charge more, provided it’s transparent and explained to people.

What sector trends do you expect to materialise over the coming year or so?

The biggest, I think, will be the realisation that we, the P2P lenders, and them, the banks, are friends and can and should work alongside each other. We’ve known it for a long time, but the banks have been slow to realise. Simply put, P2P lenders are more flexible and can facilitate lending that the banks can’t. Meanwhile, the banks offer a range of services that platforms don’t and don’t want to provide, but which can be provided alongside the loans the latter facilitate. When the borrower has matured to a position where the banks can mobilise their extremely low-cost of capital and lend to the borrower, they can jump ship. This is good for all, particularly the borrower, who receives the services they need when they need them.

But while we work with the banks, they will continue to lose their grip on and access to low-cost capital. They offer a safe haven for cash but the hunger for yield is growing every day. This will lead to more savers becoming P2P lenders – and the new Innovative Finance Isa will give a further long-term boost. This trend will continue even if interest rates rise – and that’s a big if, as the banks will not be able to pass on all if any increase to lenders as they are under pressure from shareholders to fatten their margins.

This isn’t to suggest that competition from the banks, particularly the challenger banks, won’t increase, because it will. Banks are supertankers compared with even the biggest P2P platforms, and they’re beginning to turn. But it takes a long time to turn a supertanker, and we can remain nimble. The banks will nibble at our businesses, rightly keeping us on our toes, but they won’t eat our lunch.

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