By Samin Dasai
Amazon last year recorded £4bn of sales in the UK. A whole host of new entrants are revolutionising standards of service and holding down costs for customers.
No country has embraced the economic benefits of the internet more enthusiastically than the UK. It now makes up 8pc of GDP – nearly double the level, for example, of the United States. So it should be no surprise that a financial lending system which is slow, complacent and letting down businesses and individuals is, itself, also facing competition from a wide range of new “non-bank” models. Such is the appetite for new funding models that the CBI is hosting a conference on alternative financing on Monday.
A sign of the speed of change under way is that even a year ago, I suspect, discussions would still have been dominated by whether new entrants were anything more than temporary answers to the failure of high-street banks. But when the Government chooses models such as peer-to-peer lending to channel money to small businesses to help kickstart the economy, the debate has clearly moved on. We may be the new kids on the block, but a genuine and permanent shift in the loan market landscape is taking place.
Peer-to-peer lending is now a £500m business. It took nearly 10 years to reach this figure, but such is the rate of expansion that it will double within the next two. Funding Circle, which puts people with money to lend directly in touch with successful small businesses who want new investment, has arranged loans of more than £100m in its first three years. New lending is now running at the rate of £10m every month.
The failure of traditional banks to meet the needs of both small businesses and small investors has certainly fuelled the expansion of our sector. Despite the Government handing banks cheap money to encourage them to lend more, lending to small businesses remains at disastrously low levels.
Well-run SMEs complain they are being denied the funds needed for expansion. Those whose loans are eventually approved criticise the long delays, high interest rates and security they have to provide. Savers are angry about the low returns they receive from the same banks.
But while this lack of trust in the banking sector has clearly accelerated the speed of the change, it is the disruptive power of the internet which will make this a permanent revolution. Many of the same opportunities which have seen new entrants first enter and then transform other sectors, such as travel and music, are found in the unfulfilled demand for small business loans.
There is a damaging lack of competition. The five high street banks provided 90pc of SME loans, providing too little incentive to innovate or improve their service. Costs are high. Traditional banks are saddled with expensive real estate and pay levels which they must factor into their charges.
In contrast, new entrants are lean, agile and hungry. By putting those with money directly in touch with those who want to borrow it, the middleman is cut out. Costs are reduced, which can be passed on in lower interest rates to businesses and higher returns to savers. This is a true democratisation of finance.
Decisions, too, are faster. The internet means we are open for business 24/7, not nine to five. One in two of loan applications to Funding Circle is completed outside normal working hours. Twenty-four hours for a decision on a loan is the norm for our sector. Money for successful applicants is paid into a business’s bank account within two weeks.
All this explains why a recent, independent report, from the charitable think tank Nesta found that three out of four UK small businesses who have used peer-to-peer lending would return to the sector first for future loans. Only 27pc would go back to their bank even if they offered the same terms.
There are those, of course, who still claim that a lack of regulation means peer-to-peer lending is too risky to provide a long-term, sustainable challenge to the banking industry. But one of the many differences in attitude is that while the old banks continue to resist regulation, the peer-to-peer lending industry has actively campaigned for new protections for customers.
The challenge, of course, is to put in place such safeguards without stifling the very innovation which is making what the sector offers attractive. Discussions with the new Financial Conduct Authority encourage me that this balance will be achieved. I expect the major players will be operating within these new regulations well before their official start next April.
But those who worry about risks don’t understand that one of the attractions of peer-to-peer lending is the level of transparency automatically offered. The aim is to provide all the information needed clearly and immediately. Nothing is hidden, including complete openness on the level of defaults.
So I agree with Nesta that, while the growth of the sector has been extraordinary, it has only just begun. Their report suggests that the annual market for peer-to-peer business lending could grow as large as £12bn. Other experts believe it could be even bigger.
This potential is not limited to the UK. We are not the only nation where small businesses are desperate for investment and savers desperate for better returns. Every country across Europe, with the exception of Sweden and Germany, has suffered from a dramatic fall in successful business loan applications.
Peer-to-peer lending to businesses even in the UK remains, of course, tiny compared with the loans provided by the traditional banks. It has, after all, taken centuries for the high street banks to build their dominance. But the internet is speeding up history. As Andy Haldane, the Bank of England’s director for financial stability, pointed out when predicting that our sector could be the future of high street banking, it was not that long ago that Google and Amazon were small players.
There is a constant buzz about when we will see the first UK equivalent of these internet giants. There are some incredibly talented entrepreneurs working to redesign their industries, so it would be naive to predict who or where this success story will come. But I am confident that the UK’s first £1bn peer-to-peer business lender is less than five years away. And that’s good news for businesses, savers and our economy.
Samir Desai is CEO and co-founder of Funding Circle
