Peer to peer lending: risky gamble or the best game in town?

PEER to peer (P2P) finance is becoming a force to be reckoned as a credible alternative to Britain’s banking system.

Few consumers have yet heard of this corner of the financial industry, let alone understand how it works.

But that could all change in April next year, when savers will be allowed to funnel their Isa allowance (currently Pounds 15,240) into this burgeoning market without paying any tax. Chancellor George Osborne announced the decision to include P2P finance within a new Innovative Finance Isa (IFI) in his Emergency Budget this month

That would further enhance the already impressive returns – between four and nine per cent – that are currently earned through peer-to-peer platforms, which take savers’ money and lends it out to borrowers and small businesses.

These online middlemen offer different rates of interest for lenders depending on the risk profile of the borrowers involved, but the biggest providers boast extremely low default rates.

P2P has already been enjoying a surge in popularity this year, with Pounds 507 million-worth of loans issued by the biggest platforms in the past three months alone. Data published by the P2P Finance Association earlier this month showed that lending has risen by around Pounds 48m from Pounds 459m in the first quarter of this year.

Much of the demand has been fuelled by pensioners desperately searching for income in a low interest environment. Lending Works recently revealed that the amount of capital coming into the platform from older investors has shot up by 35 per cent in the last three months – to 70 per cent overall – with over half of its lenders now aged over 55.

The largest platforms have also been beating banks and building societies when it comes to customer satisfaction. Ratesetter recently came top in a Which? poll assessing customer service across the whole financial sector, scoring 80 per cent among the consumer organisation’s 5,000 members compared to the average 54 per cent achieved by traditional providers in a previous poll.

Ratesetter also outperformed even more established P2P lenders such as Zopa and Funding Circle, which scored a respective 67 and 62 per cent.

Banks and building societies are now starting to take notice. Santander now refers rejected business loan applicants to Funding Circle, which in turn promotes Santander’s business banking services. Royal Bank of Scotland struck a similar partnership with the same platform, as well as Assetz Capital, in January.

But Yorkshire Building Society, the UK’s second biggest mutual, is fighting back amid fears that a new three-way Isa could split their customers’ loyalty. Last week, the mutual published research saying that 62 per cent of financial advisers would never use P2P platforms themselves, with 82 per cent saying that customers ‘do not understand the rules’ around P2P finance.

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