Has the Funding for Lending scheme caused dwindling interest rates for savers?

funding

Last week, research from Moneyfacts showed that the average cash ISA rate is now 1.74% – a significant and worrying drop from the 2.55% that was on offer a year ago.

A study by Which? reveals that it’s not just ISA rates that have suffered.  What they describe as the “interest rates freefall” has spread across the entire spectrum of savings accounts.

Why the drop?  After all, the Bank of England base rate has been historically low for some time now.

The answer, according to Which? is the Funding for Lending scheme which the Government unveiled back in August 2012 as its solution to the lending crisis that was preventing consumers getting mortgages and businesses from finding the business finance they need to grow their way out of economic uncertainty.

Despite the honorable intentions of the scheme – few would disagree that more business funding is needed – the unintended consequence of the scheme is that banks have cut interest rates on savings accounts because they now no longer have such a pressing need for customer deposits.

The link between savings deposits and lending is too often forgotten when it comes to coverage of the economic problems faced by the UK.  Back in the days of local mutuals, customers hoping for their first mortgage would add their name to a list and only find their application accepted when enough customer deposits – savings – had come in at the other end of the business.

Now it’s a little different, of course, but money still needs to come from somewhere.  Viewed simplistically, banks and building societies have too options when it comes to generating money to lend out to its customers.  They can use the savings deposits they’ve taken from other customers or they can raise “new money” through trading the markets.

Pre credit crunch, most large banks funded a pretty large chunk of their mortgage or small business lending through the latter – with the exception of a few, they certainly didn’t have enough customer deposits to offset the amount they lent.

Then the world changed; banks couldn’t borrow as easily – or cheaply – on the open market, they were asked to re-capitalise and the need to bring deposits and lending values closer together led to a massive scramble for savings customers.

That’s why for so long, savings rates remained far higher than base rate.

Whilst that’s great news for the millions of savers who would otherwise see their money reduced by inflation, it does beg the question of sustainability.

Then came the Funding for Lending scheme that offered banks access to cheap finance to lend on to customers.  Great news… at first.  Except that now, banks aren’t quite so desperate to real in savers and, as a result, interest rates have tumbled.

What does this have to do with crowdlending or P2P Finance?

A lot, actually.

The problem with Government schemes is that they often have unintended consequences.  The decision for Government to lend via some peer lenders could have equally unintended consequences if it leads to reducing rates on the platforms involved.

In short, it’s difficult to fiddle with one bit of an eco-system without huge consequences elsewhere – it’s what gardeners deal with everyday, we just need a bit of common sense applied to the financial eco-system.

What crowdlending offers is not a tweak to the current system but a new system.  That’s why it’s sustainable and that’s why it can offer good value for all – for investors, for borrowers and for the platforms themselves.

Crowd lenders don’t need to hold capital against the loans made as their simply arranging loans, not facilitating them.  Likewise, there are none of the costs of a big banking network to eat into returns or ramp up costs.

Savers can put their money to work (fee free in the case of FundingKnight) and borrowers can access finance generated by real people – not Government schemes or money market trades that are unsustainable at best, risky at worst.

Alternative finance is just that – a real alternative – it’s time to spread the word to investors and keep peer to peer lending going from strength to strength.

Customer participation at the heart of P2P Lending

Why suggestions from you are the key to constant improvement.

participation

(This is an excerpt from a full post published on the P2PMoney blog)

Back in November, I wrote a post about how P2P finance fits into the model of collaborative consumption – otherwise known as the sharing economy for the blog over at P2PMoney.

I made the point that collaborative finance didn’t necessarily need to equal ethical finance, social lending or any other type of ‘do-gooding’. Whilst some of the by-products of crowdlending might very well be good for the wider world (local lending for instance), most investors are in it for the returns, for the chance to make their cash work harder than it would do left in a straightforward deposit account. And that’s absolutely fine.

That doesn’t, however, break the link between P2P finance and the sharing economy. One thing that unites most of the new peer industries that have popped up over the last few years is participation. Peer based businesses need people to participate, whether that’s using someone else’s couch as a bed for the night, sharing a car or borrowing a Boris bike or participating in P2P finance.

By participating, I mean more than simply transacting. After all, transactions happen 24/7 in banks around the world. Participation is about contributing something more to the project, connecting with fellow users or participants and actively trying to make the overall experience more efficient and rewarding for everyone involved.

To read the rest of this article, visit the p2pmoney blog and to start crowdlending with FundingKnight, register as an investor or borrower via the FundingKnight website.

FundingKnight review and some more media mentions…

newspapers

As another loan successfully closes, this time giving Secure Archive Solutions the funds it needs to expand, it’s good to see that the word is spreading about how crowdlending can help boost business finance here in the UK.

TheBusinessDesk.com reported our recent P2P business loan to Secure Archive Solutions

We also got a mention on one of the Guardian blogs, courtesy of Modwenna Rees-Mogg who mentioned FundingKnight in her post about why crowdfunding is increasingly popular for SME financing

 

FundingKnight launch reviews:

Via the blog at p2pmoney: Launch of FundingKnight

P2PMoney founder, Ian Gurney, wrote:

“Looking at the website, it is well designed with clear graphics and colour schemes.”

 

On the wiseclerk.com P2P Banking website: FundingKnight launches auctions

 

Thanks to everyone who’s helping to shout about what we’re doing at FundingKnight.

Can crowdlending regain trust in business finance?

trust

2012 ended with a flurry of news about crowdlending and peer to peer lending and it seems that January has continued the trend with plenty more articles cropping up to discuss how alternative finance can help restore faith in a beleagured financial system and  provide the business funding that our economy needs to grow.

Since the whole concept of peer to peer is about sharing, we thought it would be good to share one of our favourites, a post from David Pitcher published over at SunZu (previously ecademy).  David’s post asks whether peer to peer lending can restore trust in finance for business and has sparked some interesting comments.

Recently I saw a T-shirt on which was printed:

‘Give a man a gun and he can rob a bank.
Give a man a bank and he can rob the world.’

Some businesses are still feeling betrayed by banks because they have not been lent the finance they need to develop or continue trading.
It seems to me that a key issue about banks is about their trustworthiness . After all, a run on a bank is only the loss of trust that the bank can keep our deposits safe even if they are actually safe.

Trust

Trust is the basis of all business and personal dealings. No amount of legislation can actually replace that personal and corporate trustworthiness, established, tested and proved over many years. Sadly and foolishly some unscrupulous businessmen including some bankers have done the unthinkable – for personal gain they have ‘at a stroke’ betrayed and squandered that ancient trust.
The response from a friend who is a retired senior banker was one of anger and disbelief and he simply asks ‘Whatever happened to ‘my word is my bond’?’

To read the rest of David’s article visit the SunZu website

Peer lending and Crowdfunding praised by Bank of England’s Andy Haldane

the Bank of England

Perhaps an industry knows it is on to something when someone who confesses to being “congenitally pessimistic about most things in life” admits to being really optimistic about its future… Certainly, the latest comments from Andy Haldane, director of financial stability at the Bank of England will be music to the ears of peer to peer lenders in the UK.

Speaking to the Independent in an interview published today, Andy Haldane told Margareta Pagano of his bright hopes for the future of crowd lending:

“It’s a time of opportunity knocking for finance.  Hopefully, the growth of peer-to-peer lenders, such as Zopa, Funding Circle and Thin Cats, and those involved in crowd-funding, such as Crowdcube, will help solve the problems we have in the UK with lending for SMEs.”

Haldane went on to explain how he thinks online technology has “the potential to transform finance and fill the gap left behind by the big high street banks which have little appetite for taking on risk in lending to SMEs.”

You can read the full article “Bank supremo: Peer-to-peer lending is a good reason to be cheerful” in the Independent, or start peer to peer lending yourself by registering as a lender at FundingKnight and taking part in one of our live peer to peer loan auctions.

 

Photo

P2P to be regulated. Next stop, a change to the regulations on the treatment of peer to peer losses.

letter for MPs

Last week’s news that peer to peer lending is about to be regulated by the FCA was met with pretty unanimous support from the industry, with both borrowers and lenders and the peer to peer lending platform owners themselves all agreeing that regulating peer to business lending is likely to boost rather than stifle peer to peer finance in the UK.

So that’s one battle won – or at least the first round, no doubt there is a whole host of further debate to come regarding exactly what shape the new regulation takes…

In the meantime, however, there’s an existing regulation that peer to peer lenders want changed – and that’s the treatment of losses.

Whereas banks and other financial institutions are able to off-set bad debt against interest earner, peer to peer lenders are not under current HMRC rules.

This is not only unfair but fundamentally compounds the impact of any peer to peer losses.   P2Pmoney.co.uk has helpfully crafted a suggested letter that anyone who agrees that the current state of affairs is wrong can cut and paste and send on to their local MP.

You can find the letter here on the www.p2pmoney.co.uk website.

Rothschild backs peer to peer lending as new meets old

old leaf on new grass

Following Friday’s news that peer to peer lending, including peer to business lending  is set to be regulated by the FCA (the regulator about to replace the FSA), the industry has received a further boost with news that RIT Capital Partners, Lord Rothschild’s London-listed investment trust has invested in Zopa, the UK’s first peer to peer lender who started the alternative finance wheels in motion back in 2005.

It’s a move which will inevitably prompt a whole host of “old meets new” clichés as one of the most famous bastion’s of banking joins forces with a disruptive player on the alternative finance circuit.

Speaking to the Financial Times, Lord Rothschild said,

“We are witnessing the growth of the non-banking lending market.  Following the 2008 crisis many of the banks remain under capitalised.  In these circumstances alternative forms of credit will be developed on a significant scale.  This is happening.”

UK peer to peer lending enthusiasts will no doubt watch to see whether the involvement of such an internationally renowned name does for Zopa what the arrival of John Mack did for Lending Club.

Lending Club have now processed over $1bn of loans in the US and their success has often be credited, in part, to the fact that they managed to engage the support of a recognised industry chief who could bring Lending Club the gravitas it needed to go mainstream.

Although Lord Rothschild left his family bank three decades ago, his name remains synonymous with what was once the globe’s most impressive banking group.  The decision of RIT Capital Partners to invest in Zopa will surely be seen as a rubberstamp for an industry which is rapidly growing from a small stream of niche financing into a genuine alternative to mainstream banking.

FSA to regulate peer to peer lending: Crowdlending gets a boost

FSA

...and we were already talking to the FSA 

The government has announced that it plans to regulate peer to peer (P2P) Lending.

The P2P Finance Association welcomed the news, saying:

“The Peer-to-Peer Finance Association has provided clarity and protection for consumers and businesses, but we have always strongly believed that introducing proportionate regulation was necessary to enable the sector to continue to flourish. “

Well, we’ve always been convinced of that here at FundingKnight, too.

That’s why our CEO, Graeme Marshall, explained months ago why peer to peer lending is an industry that wants to be regulated, but we also took some more concrete action…

 

FundingKnight has been talking to the FSA for several months and is well advanced with its application to become FSA regulated for those parts of its activity that fall within the FSA’s regime.

Rather than simply campaign for regulation, FundingKnight took the view that some of P2Ps current processes already fell within the regulatory regime and applied on that basis.  We hope to be the first regulated P2P Lender

FundingKnight CEO, Graeme Marshall, commented:

“FundingKnight welcomes the prospect of regulation of crowdlending / peer to business lending.  It may be that the news this week relates more to pure peer to peer lending and the extraordinary rates that are being charged to some individual borrowers but, regardless, some clarification and rules would be welcome.

Whereas FundingKnight believes that although matching lenders with business borrowers does not in itself fall to be regulated under the current rules, there are many peripheral activities that are less clear and so Government clarification and regulation would be welcomed.  This will also assist with the setting of standards for this new and exciting activity.  FundingKnight is seeking authorization for those of its activities that are covered by the Financial Services Authority.

FundingKnight has a team well experienced in financial markets who collectively believe that regulation of this industry will help crowdlending to become recognized as a new model for lenders and borrowers to be matched, using the power of an online marketplace.  We look forward to participating fully in discussions with the FSA and Treasury concerning forthcoming regulation.”

Whilst we’re not claiming that our discussions with the FSA prompted the Treasury’s response, we’re glad to see that the move towards regulation is now gaining momentum.

A framework for European Crowdfunding

front page of the Framework for European Crowdfunding report

Despite the fact that peer to business lending and all types of crowdlending / crowdfunding are niche products dwarfed by mainstream banking, last year Europe raised €300 million through various types of crowd funding – which adds up to about a third of the world market.  As at the end of 2011, 200 crowdfunding platforms were open for business throughout Europe and their number is forecast to grow by 50% by the end of 2012.

At least, that’s according to the report, A Framework for European Crowdfunding.

Before we get any further, I should make clear that the report covers the various different types of crowd funding / crowdlending including debt based funding typically associated with peer to business lending – available in the UK via FundingKnight, Funding Circle and Thin Cats.

Infact, the report manages to list 12 different types of crowd funding, which it in turn groups into four basic types:

Donation – A contribution made without tangible reward

Reward – A purchase contract for a product or service

Lending – a credit contract or loan where credit is repaid plus interest and fees

Equity – Shareholding contracts, shares, equity-like instruments or revenue sharing in the project/business, potential up-side at exit

According to Matthias Klaes, professor of commerce at Keele university and the author of the report’s foreword, these vairations on a them are linked by a common thread:

“Crowdfunding may take many forms.  But it is clear from their survey that we are witness to the rise of a new kind of investor, a new kind of entrepreneur, and a new kind of intermediary, who are all coming together in novel ways of channelling funds to innovative projects and SMEs.”

A three pronged plan of attack

venn diagram showing 3 pillars of crowd funding framework

The report calls for a three pronged approach to help oversee the future of crowdfunding in Europe:

First pillar = Regulation

“Crowdfunding intermediaries should establish criteria for all types of consumer protection, including security of information, financial control and transparency and fraud prevention.

Second pillar = Education

“For crowdfunding to flourish, we believe a pan-European educational forum is necessary to educate stakeholders, funders and entrepreneurs on the benefits of the industry and the different business models of crowd funding.”

Third pillar = Research

“The industry should drive academic and third part research…. Crowdfunding operators should should provide data sets to further industry research; the industry needs to find a transparent and open approach.  Public reporting and research will drive competition and innovation within the industry.”

Why get involved in crowdfunding?

It also shares some interesting thoughts on what motivates people to start crowdfunding.  As the digram bellows (reproduced from the report) shows, that motivation differs according to the type of crowdfunding model.

Whilst P2P Lending attracts people motivated by financial return and a more efficient way of lending and borrowing money, other types are more likely to have altruistic appeal.

different motivations behind crowd funding

Broadly, though, motivation (for lenders/investors) can be split into three:

Social return – Funders have an intrinsic motivation to help a particular project succeed.

Material return – Funders receive a product or service in return for their investment but pre-sales crowdfunding means that the investor pays the project in advance to create working capital to actually bring the product to market.

Financial return – A funder invests via a loan or equity based model and collects interest or dividend payments.

Whatever your motivation, the report makes a great introduction to crowdfunding in Europe, covering further categories such as policy discussion, European regulation and legislation and how to implement an operational framework for European crowdfunding.

You can download the full report, A Framework For European Crowdfunding here

Peer to peer finance: the book.

book cover for The Lending Club Story

Peter Renton releases The Lending Club Story.

Over the weekend, I sat down with a good book… about peer to peer lending.

The Lending Club Story was penned by Peter Renton, founder of Lendacademy.com , and is one of the first books about crowdlending to hit the shelves and – to the best of my knowledge – the first and only one focusing on the Lending Club story.

Lending Club, as one of the big US P2P Lenders, is a slightly different kettle of fish to FundingKnight or other P2P or P2B Lenders here in the UK (for starters P2P is already regulated in the US…) but despite the differences, it’s an interesting read for UK P2P enthusiasts.

You can Click here to read Peter Renton’s own introduction to his book on www.lendacademy.com including an introductory offer for those exceptionally quick off the mark.

There is a huge amount of detail on lending and borrowing via Lending Club which would be highly useful for US based readers but, for me, the best bit was the description of Lending Club’s journey from tiny start-up to an almost profitable business showing phenomenal growth and jointly leading the US into P2P Finance.

There’s also an interesting foreword from Renaud Laplanche, CEO and founder of Lending Club, in which he shares his motivation for setting up the business:

“I realized how the financial system had become focused on itself rather than its customers, and how consumer lending could be made so much more efficient and deliver so much more value.”

That’s a rallying call if ever I heard one, and one that seems to have motivated Laplanche effectively thus far; “In the 12 months ending September 30, 2012, the total amount of loans issued by Lending Club was over $540 million.  That is more than 150% growth over the preceding 12 months.”

After a slow start and an interruption to let regulation have its say, Lending Club has gone from strength to strength.

What’s interesting for me, as someone watching the development of P2P lending in the UK, is the industry that has built up around the platform.  There are a whole wealth of websites devoted to data mining or evaluating loan notes, which is no surprise given some of the case studies that Renton includes to paint portraits of some of Lending Club’s investors:

“Phillip is a very active Lending Club investor.  He logs on every day to look at new loans that meet his criteria.  He will always sort the available loans by time remaining so he only looks at the new loans that have just been added.  He will spend 30 – 60 minutes every day on Lending Club.

He has a portfolio of around $25,000 invested… and he typically invest $25 or $50 per loan.

Phillip has a second account that he uses mainly for investing on the trading platform*.  He has an interesting strategy here.  He will look for late loans that are for sale on Foliofn that have a deep discount of 90% or more.  He will invest in many of these loans with the hope that some of them will come back to current.  He has only been doing this for a few months and he realizes this is a gamble so he only has a small amount of money in this account.

Like many investors he has most of his liquid investments in the stock market, some in savings accounts and he even put some money into U-Haul Investors Club.  But his Lending Club investment is the one that gets most of his attention and the investment that he enjoys the most.

His goal with his Lending Club account is to keep growing it to where he can make $2,000 a month in interest.”

It’s investors like Phillip which hold the future of P2P finance.  It is there involvement and evangelism that will continue to shift funds away from mainstream banking and into alternative finance.  According to Laplanche, that’s what will help capital flow more efficiently.  Let’s hope he’s right.

*Lending Club’s secondary market