Peer to Peer finance takes on the banks
- 4 October 2011
Now, he's hoping to extend his interests from minibussing to minibanking. He's currently working on a Channel Four series which, next year, will feature the Bank of Dave. Bank of Dave is the working title but however it ends up, the storyline is that Fishwick will help growing businesses find investment and loans without recourse to high street banks. Fishwick knows all about business ups and downs – his helicopter business set up in April 2005 failed to get off the ground and was dissolved in January 2007.
But that only illustrates the point. Small businesses find it difficult to move – let alone fly. However, bank critics say, bankers continue to pay themselves mega-bonuses while refusing to finance new ideas or existing businesses.
The banks respond: "Businesses are not presenting enough loan-worthy projects," The government's Project Merlin, launched in February was supposed to have squared that investment circle. The big four banks committed themselves to lending more money in 2011, especially to small businesses (as well as rein back bonuses).
Merlin has not worked (or at least not yet)
Where Fishwick will get his capital from and how much he will have to invest are both unknowns until the show screens. But in August last year, two young entrepreneurs started up Funding Circle – a "peer to peer" concept where those with capital to lend or invest are introduced to businesses which need the money.
Funding Circle is part of a growing movement to cut out conventional banks by joining the two sides of the equation. So Zopa offers savers more and charges borrowers less by leaving out the intermediation that banks provide. As it says, lenders get lovely returns, borrowers get low-cost loans and money becomes human again.
A foreign exchange website CurrencyFair offers the same idea turning your euros into sterling or Swedish Krona into South African rands (and vice-versa and in around a dozen other currencies). By cutting out the middle man – the bank – it claims both sides get better value, as much as 5% with some transactions compared with high street banks.
Peer to Peer operators make a lot of cutting out banks. But to become a viable competitor to established finance firms, they need to overcome a number of hurdles.
· Regulation – some activities are controlled and demand minimum balance sheet requirements or investor protection – loans and foreign exchange are currently exempt but regulators are watching to see how they grow and whether they will then present greater risks.
· Source of capital – are those with money prepared to take the risks involved (in return for enhanced interest or capital returns) in dealing with specific businesses or borrowers knowing that recipients could default?
· Complexity - peer to peer banking sites have to explain how they work, how those with money have to choose the level of risk they are prepared to take, and how this can be assessed.
· Clarity – sites can quote returns before fees and other charges and before bad debts and defaults which can mislead
· Critical mass – the biggest obstacle facing peer to peer finance is getting enough business on both sides to be viable and visible alternatives to banks. Three of the bigger sites, Zopa.com, ratesetter.com and fundingcircle.com have managed £100m or so over the past year – not enough to worry the banks as yet. And forex swap site Currency Fair needs enough customers with a sufficient range of currencies to work – an alexa.com search suggests relatively few users so far.
Funding Circle founder Andrew Mullinger told Mindful Money that, over its first year, there had been around £28.4m worth of funds looking for businesses, with £11.4m taken up so far.
"At the start it was hard but we now have a critical mass of lenders looking for borrowers – it takes more time for a borrower to be accepted as we have to assess them. We now have that weight of money so we intend to expand over the next few years to hundreds of millions – perhaps billions," Mullinger says.
So far – and it is early – the default/late payment rate has been low with just two loans in default and four late. Allowing for fees and problem payers, returns to lenders are around 6.5% to 7% – while borrowers are paying an average 8.3%.
"According to figures from the Forum for Private Business last November, firms would pay around 12.3% on a like for like quality adjusted basis for similar loans from banks against our 8.3%," says Mullinger. "So they are saving 4% a year on interest costs," he adds.
Zopa says its lenders earn an average 6.8% after charges and bad debts while borrowers save around 20% compared with a bank product.
It says: "Our lending has hit 2% of bank consumer lending so while small, it is starting to be noticed. We've been around for six years – it took Amazon and eBay longer than that to achieve their market dominance,"
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