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P2P Lending Websites Partnering with Banks
I have recently been wondering whether some readers might be concerned by the increasing cosiness between banks and P2P lending companies?
Since you're not a very chatty lot – in terms of completing our article comments – I'm going to take your silence as a “Yes”.
I'll put your mind at ease straight away and say that, on the whole, it's a positive thing for lenders. However, there are a few downsides.
I'll start with the good news:
Banks are sending us people to lend to
Firstly, the government is beginning to force banks to refer rejected business borrowers to “alternative lenders”, such as P2P lending companies.
Yes, these are bank rejects, but that does not make them P2P rejects. The banks are good at rating old traditional businesses in an old traditional way. Peer-to-peer lending companies are using much more modern techniques to analyse companies and are finding lucrative pockets that banks have failed to see potential in.
More borrowers is great news for lenders
That's all very well for borrowers, you might think, but how does it help us lenders?
If there aren't enough borrowers, we lenders have money sitting around for a long time before we can get it out on loan. In addition, if there is more money to lend than borrowers need, we lenders compete with each to win loan parts. This pushes interest rates down.
Conversely, we need more borrowers to keep our money on loan. Plus, if there are more borrowers there is less competition between lenders That holds interest rates up and can even give them a big boost.
When banks compete to lend
Banks and other financial institutions have started to lend as well, not just ship over borrowers. In this regard, there are both pros and cons for us lenders. Rather, I count one pro, two cons.
Pro: helping the market to function better for lenders
I'll start with the “pro”. Financial companies are being either lenders of first or last resort. Sometimes they'll either take on the whole loan that is arranged by the P2P lending website, and then individual lenders can buy bits off them when they want to. Or they're mopping up any parts of the loan that aren't taken up by small lenders.
This makes it much easier for the P2P lending companies to keep the borrower supply switched on and growing, which is what lenders need. Without financial companies support it is harder to ensure that the balance between borrowers and lenders is reasonable and some P2P lending companies can go through see-saw periods as a result.
Con 1: lower interest rates
Sometimes, financial companies are simply competing with us lenders to lend their money. We don't necessarily want big lenders with lots of cash suddenly arriving on our favourite P2P lending website, because the extra cash can push down loan rates.
Con 2: banks potentially get first dibs on loans
The P2P lending websites now have two distinct sets of customers to service: individuals like you and me on the one hand, and now, on the other, there are the big money lenders, such as high-net worth individuals, financial companies and potentially other businesses with lots of cash swimming around.
There is no doubt in my mind that at least some of the P2P lending companies will not balance their two sets of customers properly.
Some seem to be making it fair and, in some ways, potentially easier for individual lenders than large financial companies. Only 3% of RateSetter‘s lenders are financial institutions, for example, which is astoundingly low for a large P2P lending company that could easily do more for big lenders if it chose to.
For most P2P lending companies, however, how they are is dealing with their two sets of customers is a blur.
It's still far too early to point at any P2P lending companies and say that they're putting financial companies and other big lenders first. But the lure of lots of cash in one go, and just needing to arrange a few cosy relationships with a few big companies, is surely going to have an influence on some of them.
We'll keep our eyes open and report to you candidly, as usual. Please let us and our readers know if you come across any suspicious evidence.
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