No, P2P lenders aren’t going to topple banks – but we don’t want to
Peer-to-peer lending was born a decade ago and has offered an alternative and often more accessible route to funding for thousands of small and medium sized businesses.
The sector’s popularity has exploded in recent years, leading many, including a newly published report from Deloitte, to assume that platforms now have the established banking sector in their sights.
This assumption is wrong and Deloitte’s report misses an important part of how the peer-to-peer industry works.
Read more: Banks' dominance of lending market set to continue despite P2P growth
Central to this misunderstanding is Deloitte’s assumption that borrowing businesses willing to pay a “material premium” to access loans will soon be “in the minority”, seemingly put off by the higher cost of borrowing compared to banks.
This fails to recognise that rates of lending and borrowing on peer-to-peer platforms are determined by supply and demand, so if businesses are no longer willing to pay a certain rate, the market dictates that it will fall.
Lenders currently receive highly-attractive interest rates, an average of nine per cent on ThinCats’ loans, so there is plenty of room for these to drop if borrowers are no longer able to pay the rates they do.
Even if high-street banks were to return to this hitherto neglected part of the market in strength, rates would have to fall dramatically for peer-to-peer investors to consider moving their money elsewhere.
Read more: The Lending Club fiasco won’t send P2P back to the dark ages
Nevertheless, Deloitte is right in its more general point, that peer to peer poses no “serious threat” to the banks. The sector is under no illusion that it will topple these institutions, which have existed for hundreds of years, nor does it want to become like them.
Yes, since 2010 more than £5bn has been lent through peer-to-peer platforms, and yes the sector’s growth has been consistently impressive with more than £2.2bn lent in 2015 alone, but the total remains a drop in the ocean compared to the funds available from high street banks.
It’s an astronomical rate of growth for a young industry, but peer-to-peer platforms are likely to remain an alternative. They provide a vibrant, flexible and competitive product, and while many platforms are becoming more mainstream in their approach, they serve a part of the market that the banks continue to neglect.
Businesses are attracted to peer-to-peer because of the speed and convenience of the process, and it has become a first port of call for many businesses with special requirements.
This market may only exist because banks failed to meet the demand for loans to individuals and SMEs, but in its short life it has carved out a niche, and will continue to grow.