Social Finance: why peer-to-peer lending and crowdsource funding is a threat to banking profits
Banking is having a difficult time in the UK at the moment. Falling asset values is squeezing their solvency, forcing them to reduce lending at a time when the economy may need more. Scandals such as PPI and public anger at bonuses has damaged the trust that once existed with society. New entrants such as Virgin, Wonga and Marks and Spencers are likely to start chipping away at the size of the market available to them.
Consumer lending faces another challenge: the growth of peer-to-peer lending. Currently estimated to be worth £250 Million, poor savings rates and uncertainty over investment returns has prompted some of those with money to spare to experiment with the concept. Sites such as Zopa facilitate loans by connecting the people who need to borrow with the people willing to lend. The amounts tend to be small (a few thousand pounds), the returns modest, yet the sector is growing as mainstream lending becomes more expensive and difficult to access.
Interestingly these arrangements seem to be about moving money through generations. A BBC news report into the sector suggests it is older people who have spare funds as they approach retirement who are offering funds, whilst those borrowing tend to be younger.
It isn't only consumer lending that is benefiting from "crowdsourcing". Sites such as 40 Billion and Peer Backers provide a means for small businesses to find funds that bypasses the traditional need to approach a bank. These sites crowdsource financing by bringing together numerous individuals to pay a small part of the total funding required.
Clearly there are risks attached with this and not everyone will find the idea of lending money to individuals or companies they have not met attractive. As such it is unlikely that social finance will replace traditional lending, or even become a significant element of the lending landscape. It will, however, become a drag on income for banks as they find more sophisticated investors and increasing numbers of loan customers move away.
As always with these potentially disruptive business models, the question is whether new innovations that extend it further will eat deeper into the banking system.
Consumer lending faces another challenge: the growth of peer-to-peer lending. Currently estimated to be worth £250 Million, poor savings rates and uncertainty over investment returns has prompted some of those with money to spare to experiment with the concept. Sites such as Zopa facilitate loans by connecting the people who need to borrow with the people willing to lend. The amounts tend to be small (a few thousand pounds), the returns modest, yet the sector is growing as mainstream lending becomes more expensive and difficult to access.
Interestingly these arrangements seem to be about moving money through generations. A BBC news report into the sector suggests it is older people who have spare funds as they approach retirement who are offering funds, whilst those borrowing tend to be younger.
It isn't only consumer lending that is benefiting from "crowdsourcing". Sites such as 40 Billion and Peer Backers provide a means for small businesses to find funds that bypasses the traditional need to approach a bank. These sites crowdsource financing by bringing together numerous individuals to pay a small part of the total funding required.
Clearly there are risks attached with this and not everyone will find the idea of lending money to individuals or companies they have not met attractive. As such it is unlikely that social finance will replace traditional lending, or even become a significant element of the lending landscape. It will, however, become a drag on income for banks as they find more sophisticated investors and increasing numbers of loan customers move away.
As always with these potentially disruptive business models, the question is whether new innovations that extend it further will eat deeper into the banking system.
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