By bringing together savers and borrowers directly, peer-to-peer lending, or P2P for short, bypasses the banks. The cumulative total of loans is forecast to reach £2.5 billion in the UK this year, according to the trade body, Peer2Peer Finance Association. Although these totals are as yet still a tiny proportion of the UK’s £170 billion consumer credit market, this could change fast.
Its credentials as a game-changing industry prompted the Bank of England’s Andrew Haldane to suggest: “The banking middle men may in time become the surplus links in the chain.” However, following news that the giant investment bank Goldman Sachs may be poised to back peer-to-peer lender, Aztec Money, it is clear that the very nature of P2P lending is changing. Banks and other big institutions are quietly recasting themselves as new links in the chain.
Banks are themselves becoming major lenders on some P2P platforms. For example, Forbes estimates that in the US, 80-90% of the capital lent through the two largest P2P lenders, Prosper and LendingClub, is now institutional money.
This means that when you take out a P2P loan, you are now less likely to be borrowing from individuals who often combine a social approach to lending with their desire for investment returns. As an investor, you might find it harder to compete for the best value loans.
Some banks and big institutions are buying up bundles of loans originated on P2P platforms, in some cases repackaging them and selling them on as asset-backed securities. Those with all but the sketchiest memories will immediately recall the way US mortgages were repackaged and traded prior to the 2007 global financial crisis.
