I was heartened recently to read the chief executive of Bibby Financial Services – what I would call an old-school financial services company – warning of a ‘bubble’ in peer-to-peer lending.
As the co-founder and chief executive of one of Europe’s largest peer-to-peer lenders, I knew this warning meant one of two things; either the old world of finance is starting to get scared, or they still don’t understand what peer-to-peer finance is all about.
Building online lending businesses from scratch has allowed peer-to-peer players to undertake a whole-scale re-evaluation of how the lending process should work, making it fit for the world we live in.
Peer-to-peer fundamentally changes many of the core risks faced by traditional lenders. Concentration risk vanishes when spread across many investors, forex risk similarly when investors can lend directly in the currency the borrower needs. Lower risks mean lower costs, which turns into lower fees for small businesses that need capital.
Traditional commercial lenders often still evaluate risk by sending auditors to inspect warehouses and having bank managers evaluate management teams and type up credit reports which are then passed around internally.
It’s little surprise that these legacy lenders struggle to understand how peer-to-peer lenders' modern mathematical risk models, analysing business data in seconds, can outperform the methods that have served them for the last century. A world where the strength of business fundamentals is more important than the strength of the chief executive’s handshake must seem alien to them.
Many of the skill-driven high-growth businesses that are coming to dominate the modern economy are flocking to peer-to-peer lenders. Traditional lenders have long ignored them or insisted on onerous personal guarantees due to their lack of tangible assets, but with more sophisticated risk models and investors who understand their business models it is the peer-to-peer industry that is opening up business finance to these sectors vital for the country’s future economic growth.
The peer-to-peer industry is also committed to transparency. Alongside our peers at Funding Circle and Zopa, at MarketInvoice we have published our entire loan book publicly allowing anyone to analyse our raw data on returns and losses. Our loss rate is just 0.03 per cent across over £450m of transactions
We’d invite traditional lenders to similarly open up their loan books, but transparency – much like data-driven risk decisions and peer-to-peer lending – is perhaps something many of them will find hard to swallow.
With the rise of peer-to-peer, we are finally seeing the democratisation of finance; power is being given back to small businesses and individual investors alike.
Far from overheating, the sector still has a long way to go; the fact that the traditional lenders are worried should come as no surprise.