The departure of some established names, such as ING Lease, from the market has created new opportunities for rivals.
These range from deposit-taking banks to peer-to-peer (P2P) lenders, an entirely new breed of finance providers whose number-one challenge is to win credibility – with potential borrowers, with potential lenders, and, in time, with the regulator.
For all new entrants to the commercial finance market, targeting potential loan customers is relatively straightforward. By promoting their own willingness to lend, the speed of their decision-making and their affordability, they will hope to attract the right kind of borrower.
P2P lenders, however, face a much bigger challenge on the supply side. Rather than drawing on the funding of institutional investors or depositors, they need to convince savers – both private individuals and SMEs – that the potential risks of becoming a lender on the platform do not outweigh the benefits of the potential high returns available.
That’s why the UK P2P lending industry has taken the unusual approach of lobbying to be regulated. It recognises that the Financial Conduct Authority’s (FCA) stamp of approval would be a big comfort for potential lenders.
Although it was confirmed in March that the FCA will regulate P2P lenders, we will have to wait for a more detailed consultation to establish the specific requirements. However there is plenty the industry can do in the meantime to provide assurance for the FCA and potential lenders.
One potential obstacle to attracting more lenders is the fact that the P2P lending industry isn’t covered by the Financial Services Compensation scheme, and it’s not clear that it will be covered in future. To address this disadvantage, P2P lenders could improve the safety net they offer to their investors by ensuring the effective collection of any outstanding balances in the event of the platform’s collapse. Such a safety net would increase customer confidence and enable P2P platforms to continue developing their businesses.
The industry should also look at enhancing its credit checks on potential borrowers and ensuring that monthly or quarterly data is available to assist with the analysis and management of their loan portfolio. The confirmation that there will be regulatory recognition is a major win for P2P lending, and certainly it will be essential for the industry to work together to engage with the FCA on the specific detail of the regulatory regime.
But the industry isn’t just in competition with the banks – increasingly these platforms are in competition with each other to win potential lenders’ trust, and in future they will be scrutinised by the regulator as individual businesses. That makes it crucial for P2P lenders to consider whether they are already doing everything that they can to make their systems as robust as possible and ensure that they have the necessary backups in place.
Ian Dennis is business development director at LPM Outsourcing