The superior returns of investing via p2p
The distinction between savings/deposit products and p2p investments
Investor protection tools and risk management
Is p2p purely for borrowers that have been rejected by the bank?
You can read the fully transcribed interview below, or listen in here from 4 minutes in.
AV: Can a saver beat the returns that you get on deposit with an institution like yours, and by how much?
RL: Yes they can. It’s not a like-for-like in a way because the rates they get on peer-to-peer lenders like RateSetter are not like a savings account – it’s different to a deposit account.
AV: How is it different?
RL: Because the deposit account is ultimately underwritten by a state guarantee – the FSCS as it’s called – so the £85,000 guarantee scheme, whereas peer-to-peer lenders currently are not.
AV: Right, so you will have to warn people won’t you that they’re taking a risk with their money here that they wouldn’t take with any other kind of deposit?
RL: Absolutely – this is for informed savers. The attractive thing is that they have a choice now. They can go to the totally homogenous state-backed savings account and they will get a rate that over the last four or five years has been very, very low. Or they now have an alternative. They can go online and they can look at these peer-to-peer lending platforms and assess whether the rate is attractive.
AV: What are you talking – 4, 5, 6%?
RL: Yes, on our site it’s anything from 2.5% to about 5.5%.
AV: Ok but you do take a risk there don’t you I mean you take a risk that some of your loans go bad – you’re effectively acting as the banker. How do you guard against that – do you have any say over the sorts of business that you’re lending to?
RL: Yes, the first way we guard against it is that we vet the borrowers very carefully, and that process I think is very similar to the traditional banks. On RateSetter, for example, we only approve 1 in 5 people. It’s not as though you just turn up and get a loan. There’s a proper process – and that’s kept our bad debt rates very, very low – below 1%. Secondly, on our site we have put safety or predictability at the heart of what we do. All our borrowers pay into a fund, which is called the RateSetter Provision Fund, and that has always provided savers with precisely the rate they expect.
AV: Right but you don’t get out for nought do you and you are, as you acknowledge, taking a higher risk with your money than you would be with a bank. And how do you get over the thought that a borrower who wanted to come to a peer-to-peer lender to expand their business would be the sort of borrow who wasn’t able to go to a bank?
RL: Well there’s two types I think. In the consumer space – because it’s individuals borrowing as well – actually we’re finding that it’s the savviest borrowers that are coming to peer-to-peer lending. They’re going to price comparison sites, for example, and they’re seeing that the rates are very competitive. In small businesses, it’s not just because they can’t get access to bank finance. I’m not going to go into why banks aren’t lending because I think that subject has been covered. But I think businesses now realize there’s another alternative and it’s not that they’re not creditworthy. What’s interesting is now that the industry has developed, I mean it’s four or five years of market practice, we’re finding that individuals and businesses are going back to borrow via peer-to-peer lending.
AV: That’s interesting and maybe partly because they’re not that happy with the service they’re getting from the banks.
RL: That’s the point.
