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.