Peer to peer: a new pressure on banks?

When I worked for the Financial Times 30 years ago I trusted it, and I trust it now, so when Matthew Vincent writes in Saturday’s paper that a senior British banker says that peer-to-peer lending is “a product of its time,” I believe him. And both are right – journalist and source.

Peer to peer circle logo

The online phenomenon of peer-to-peer lending needs to be considered and understood. Companies go online and they can borrow from individuals who want to lend money, but are probably not attracted by the rock-bottom rates now being offered by the banks. The websites are clear, easy to understand and describe the risks of each of the supplicant companies. They are not yet regulated, but that is not far off and Government has given a seal of approval by investing in several of them.

It is a product of its time, but is that time long or short? The banker is saying that he believes it is short – as interest rates rise and defaults become more common, the peer-to-peer websites will dwindle and die.

I don’t believe that will happen for two reasons:

Firstly, I don’t think that those companies which borrow from peer-to-peer sites are either irrational or short-sighted. The objective and the anecdotal evidence points strongly to a “reluctance” – that is the weakest most diplomatic word I can use – of the mainstream banks to lend into the SME market. Quite the reverse, if it was not for Government pressure, I believe they would desert this market for big-ticket corporate lending, where the risks are lower, and personal lending, which can be automated.

Lending to small companies means spending time understanding those businesses and the people who run them. It used to be what banks were all about – remember branch managers? Those of you under 40 probably don’t understand what I’m talking about – but that is what these men and women spent their working days doing. They knew local people and they understood what local companies did. They could assess risk and – very importantly – the risk stayed with them. If the loan went bad, their careers were on the line.

The danger of outsourcing risk

Not now: risk assessment in banks is outsourced to a “risk department.” When next I drive down the street should I drive as fast as I can and outsource the risk that I might hit a child to a “risk department?” Would that increase my caution and responsibility? You judge.

The second reason is price and the ease of getting a loan. Borrowers from peer-to-peer lending site are currently paying 8-9 per cent ­ – very high, but not a kick and a spit off what they would be charged by banks, whose cost of capital is a lot lower, courtesy of George Osborne and his Funding for Lending Scheme. But you get your money from an online site in a few weeks.

Companies I have spoken to recently have spent up to a year trying to obtain a loan from a bank – in one case eight months trying to talk to their “relationship manager” – some relationship. A company which I chair had an EFG loan approved in October, but was only able to draw the cash in August. Do I believe that this is unfortunate? Incompetence? Accident? No, discounting the fact that there were three (repeat THREE) different “relationship” managers during that time, do I believe the bank really wants to lend? Again, you judge.

Whatever your decision, that sort of situation is extremely serious for our economy. Bank of England figures show that money is not flowing from Quantitative Easing (printing money) to lending to businesses. There must be a better way and if mainstream banks can’t provide it then perhaps peer-to-peer lenders might.