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.

FundingKnight review: What makes us different for investors

being different

This week, a potential investor was kind enough to email us and ask what makes FundingKnight different?  She is keen to spread her investments over a wide range of products and wanted to know what unique differences set FundingKnight apart from other crowdlenders she uses.

We’ve sent a personal response with some answers but if one potential investor is asking the question, it obviously means that there are more of you out there who would like to know more about exactly what’s different about investing with FundingKnight.

So, here goes, a quick review of FundingKnight for lenders.  Feel free to check out the points below for yourself and gives us your thoughts – our door is always open to customer suggestions, tips and constructive feedback.

We lend to businesses not individuals

We arrange loans for businesses rather than people.

Why does it matter?  Deciding whether to invest in businesses or individuals is obviously a personal choice, but we think that the public information that’s available about businesses – such as accounts, cashflow analysis etc. – coupled with the internal and external credit checks we run, make it easier to assess whether a loan from a business is likely to be repaid successfully.

We offer fee free lending for investors

Investing through FundingKnight is fee free for investors.  There are no annual fees, account fees or hidden charges or costs, although of course, there might be tax to pay on any returns.  Many P2P lenders charge fees to investors..

Why does it matter?  It’s cheaper. Investors through us pay no fees, so the interest rate you bid is the interest rate you receive (pre tax and defaults).

We make it easy to sell part of your investment on our loan exchange

FundingKnight let you choose exactly how much of your portfolio you want to sell on the loan exchange.

For example,

You place a bid in a live auction, bidding to invest £1,000 in Apple Accounting Ltd. at 10% over 3 year loan period.

Your bid is successful, the auction completes and you now hold a £1,000 investment in Apple Accounting.  Each month you’ll receive a payment including capital and interest at 10% (prior to any tax and defaults).

A year later, you need to access some cash to finance some unexpected repairs.

You need £600 but you don’t want to cash in the whole of your investment, as you’d like to continue to receive 10% interest on the remainder.

With FundingKnight, you simply tell the system how much of your investment you want to sell, what price you want to offer it at and submit to put it live on the loan exchange.

One of existing investors, Steve Lee, recently called this feature “a superb solution, the best one available on any of the platforms I’ve used.”

You can invest everything that’s in your account

You don’t have to lend in ‘multiples’ on FundingKnight.  We do have a minimum investment of £25 but after that, you can add on whatever is left in your account to ensure that all of your cash is working as hard as it can for you.

For e.g. if you have £32.50 left in your account, you can invest it all rather than investing £25 and having to add more funds to release the remainder.

Finding borrowers and designing loans

Although we’re focusing on investors today, there are also several unique points about how we look after the businesses that borrow via FundingKnight.

  • We offer the chance to take upfront payment holidays, which can be very useful for businesses that need time for the loan investment to start flowing through into cashflow and profit.
  • We use forward – looking as well as historical information to assess applications and focus on how the loan will be repaid out of cash flow.
  • Investors will have access to a cash flow forecast for each loan, information that many P2P Lenders don’t provide.

Hopefully, that gives you some more detail about why crowdlending with FundingKnight offers a better way to lend money.

Please feel free to leave a comment with further questions or drop us an email at [email protected]

Peer to peer lending: Evolution and devolution

campaign banner with slogan 'of the people, by the people, for the people'

It’s tempting to think about Peer to Peer Lending (P2P Lending) purely in terms of progress, as an evolution towards a new way of lending and borrowing money; but, whilst there are plenty of reasons to think of P2P Lending as the future of savings and investments, it’s not all about looking forward…  Sometimes, it’s just as important to learn from the past.

Banking grew out of personal relationships.  Even relatively recently you could walk into a high street branch of your bank and talk to a bank manager who knew you and your situation… and who had the power to make a decision, there and then.

Yes, there were national and multi-national banking chains but despite their size, a personal connection remained between a bank manager and their clients.

Roll forward a few years and the internet has come along and changed everything.

Why the internet?

Well, because it was the web that ushered in a new era of competition in banking.  Overseas banks – like ING, Icesave or ICICIC – plus everyone from supermarkets to department stores rushed to woo customers with great online deals.

Savings rates rocketed, whilst mortgage rates fell and the introductory rates were good for everyone… until they weren’t.

Having decided to compete for rate grabbing online customers, the banks were under pressure to cut costs to avoid hurting their profits.

Again, the web stepped in to help.  Faced with the huge infrastructure of branch networks and an urgent need to save money, banks saw the internet as a way to scale back customer service and introduce customers to lower cost, remote ways of doing business.

That, too, worked really well.  Until it didn’t.

Suddenly, customers weren’t so much connected to a brand as making temporary use of a headline grabbing interest rate and instead of using the web to get closer to customers, banks had used it to create a gulf.  The clients, whose relationships they valued no longer had a way to chat or engage with them, even picking up the phone often meant speaking to an offshore call centre.

Peer to peer lending is online too – but instead of a service that’s remote and aloof, we want to use the social web to create a community of lenders and borrowers.  We love the efficient, 24/7 feel of doing business online but we know we need to listen to and engage with our community, too.

We think P2P Lending can help rewind the clock to a time when local communities helped themselves.  P2P Lending can be large scale if you want to invest nationally, or it can become hyper-local for lenders who want to invest in businesses within their own communities.

As the concept spreads, the amount of loan opportunities will grow and there will be more and more choice about where – and who – to invest in.

That power to control your investment is our way of giving power back to customers.  Whilst P2P Lending offers a great return on your money in comparison to high street deposit accounts, we are being careful to create long-term, sustainable lending communities that create deals that offer better value for everyone.  We’ve used to the web upfront to save on infrastructure costs so our great rates really are great, and they don’t force us to compromise on service as a result.

As a FundingKnight Lender you benefit from making your money work harder and get more say in the business investments that are right for you.  Meanhile, borrowers are assessed as real people, rather than treated as data to be plug into a computerised scorecard.  We like to think it’s combining the best of both worlds – the efficiency of the social web with traditional relationships banking.

So, yes, P2P Lending is progress, but it’s about devolving power back to you, the customer, as well.

We’ll use the web to get closer to our customers and we’ll use social networking to listen to what you want.  It’s early days here at FundingKnight but we hope you’ll head over to our website and sign up to stay in touch and please do let us know what you think; we’d love to hear what you’ve got to say.

Or, if you are a well established British business looking for a fast, flexible and competitive loan, apply for business funding today, we’ve got funds ready to lend.

Photo used under Creative Commons License

Interest? What Interest?

graph showing twenty years of base rate changesChoosing what is the best investment has become a whole lot harder since interest rates tumbled.  Now, most savers are on the look out for higher interest rates.  FundingKnight blogger Mark Harrison reflects on how at least one thing – the research process for finding the best savings and investments – has improved.

 

Getting at information has become a lot easier over my lifetime.

When I was a lad, there were two building societies on the local high street, and if you went in, you could queue up and discover what interest they paid.

At some point over the intervening years, the banks and building societies decided that they should ‘big it up’ a bit more, and started advertising their interest rates in their windows. (Of course, a lot of the building societies had turned into banks, but that’s another thought for another day.)

Now, if I walk around my local shopping centre, I see big numbers.

Well, big placards anyway.

The numbers themselves are small.

The Internet, of course, has really transformed information gathering. When I wanted to find out what the best interest rate on a deposit account was, I didn’t go down and look at the placards – I went to Google, which pointed me to http://www.money.co.uk/savings-accounts/all-savings-accounts.htm

According to them, the best rate I could get on my savings would be 4.7%. To do that, I’d need to head off to Scottish Widows Bank and commit my money for 5 years. Oh, and I’d have to pony up a minimum of £10,000.

If I was prepared to tie up my money for ‘only’ 3 years, the best I could do would be 4%. And at 2 years that comes down to 3.75%.

Whether you’re trying to build up savings for a future retirement (or, a rainy day), or actually trying to live on savings, the future is looking bleak.

To become a lender with FundingKnight, you don’t need £10,000 – you can start with as little as £500.

It’s not like a bank account, though – because you’re not paying for the huge infrastructure that high street banks spend billions maintaining – instead, you’re lending directly to British businesses. That’s why we’re able to offer our borrowers lower rates than the banks – but still ensure our lenders get rather more than 3.75%

Picture Credit