RateSetter weighs in on the Great British bank-off debate

By Ryan Weeks on Wednesday 30 May 2018

Editor's PickAlternative Lending

The peer-to-peer lender’s chief executive has rebutted the suggestion that peer-to-peer lenders want to become banks.

Last week, we published a two-part series on why some of the UK’s best-established fintech firms are becoming banks, and how the remaining non-banks fit into an increasingly competitive market.

Today, leading peer-to-peer lender RateSetter has waded into the debate. Its chief executive officer and co-founder, Rhydian Lewis (pictured), has written to AltFi, saying that peer-to-peer lenders do not want to become banks, because their purpose is ‘very different to that of banks’.

“Peer-to-peer lending is optimised to deliver value, whereas banking is focused on providing certainty,” he wrote.

“Therefore, the place for rainy-day savings is generally going to be a bank, but for the opportunity to put your money to work, accepting some risk, investing in peer-to-peer lending is a great choice.”

Lewis’ argument is that everyday investors can achieve a higher return than savers by foregoing to the two ‘guarantees’ offered by bank deposits: ‘access and capital protection’.

The RateSetter boss acknowledges that the higher returns on offer through peer-to-peer firms are often seen as a reward for taking on greater risk, but says there is another way of thinking about this point.

He reminds us that, while investors and borrowers on P2P sites hold direct contracts between each other, banks work differently. A bank will have a contract with the depositor and a separate contract with the borrower.

Lewis argues that banks and P2P platforms fund loans of a similar quality, but that banks must cater to a range of funding sources, including deposits, debt commitments from long-term institutional investors and shareholder equity.

RateSetter, on the other hand, caters only to individual investors. Lewis argues that these investors, by owning loan contracts directly, ‘are providing the equivalent of all the bank’s funding instruments – both debt and equity – and therefore receive the benefits of that combination’.

“In the long run, the cost of capital for the two models will converge, so that investors in P2P platforms can typically earn the blended average of what banks pay for their funding instruments,” he added. 

While it should be noted that RateSetter has worked with institutional investors in the past, the platform currently funds all of its loans via retail money.

The platform is a member of the UK’s ‘big three’ peer-to-peer lenders, alongside Funding Circle and Zopa, and has lent more than £2.5bn to date, according to AltFi Data. Its current 1 year net return stands at 4.6 per cent.


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