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Will Banks Be Duffed Up By P2P Lending?

Eddyyy intends to start up as a peer-to-peer lending company offering personal loans. We have little information about it and so we don't know if it will get off the ground, so I shan't be reviewing it today.

But what we do know is its slogan is “It's time to fuck the banks”.

I don't think it's looking to attract what the regulator calls the “sophisticated investor”. The question is, will Eddyyy or other peer-to-peer lending websites succeed at duffing in the banks?

Banks have more to do than just lend money

You might not realise this, but the Bank of England only creates a small portion of the money floating around our system.

The vast majority of British pounds are created out of thin air by high-street banks like Barclays, Lloyds and HSBC.

They do this whenever they make new loans. If they lend a borrower £5,000, they do so by making most of the £5,000 exist suddenly at the touch of the button. Only a small part of it existed already in the form of customer deposits.

There are limits to the amount they can create, although those limits have got pretty loose these days. Banks lend far, far more than their customers have placed with them in current accounts and savings accounts. It's just one part of the reason the financial system has got so unstable.

So the banks create our money.

This isn't some kind of conspiracy theory I'm writing about. It's called “fractional-reserve banking” and you can read about it on such respected digests as wikipedia here.

Banks have spread through the entire financial system

Not to sound too much like they're a virus, the Borg or some other thing that insidiously infiltrates things in an unpleasant way. But.

If you look at all other investments like bonds and shares, the banks and other institutions have found a variety of different ways to profit from these activities very easily, getting far away from their plain bread-and-butter, traditional approach of making money by lending other people's money.

I'm sure that at least a chunk of what they do has positive effects, such as increasing competition.

But the point is that I can see no reason whatsoever why they won't find plenty of ways to profit from this new type of lending that is peer-to-peer and marketplace lending. Not because it is already identical in most ways to what they do already, but because it is easy for banks to spread into new financial products. As they have proven time and again.

It has already begun

Metro Bank has already announced a deal to lend on Zopa. Santander and business loans P2P lending website Funding Circle* have a commercial arrangement in place for referring customers to each other.

Other banks and financial institutions are already working with P2P lending websites in other ways. Integration is already happening.

I have zero doubt as to what will happen to banks with the rise of peer-to-peer lending: they'll carry on as normal. Perhaps they'll be forced to operate more efficiently in some ways due to the competition, but otherwise that's it.

Behind the scenes they might do things slightly differently. They will increasingly lend their customers' deposits through peer-to-peer lending, effectively outsourcing their borrower selection and debt-chasing processes.

They will also buy up peer-to-peer lending websites or even start their own P2P operations.

They call P2P lending “disruptive” finance, but it is only temporarily so. As the banks adapt, I'm afraid we shall certainly find that we still haven't taken control of them, we haven't duffed them up.

Sorry for the bad news. Still, at least we'll continue to benefit from this great new type of investment.

Letting the side down

Changing the subject slightly, on Edyyy's website the hopeful start-up complains that banks have hidden costs.

The irony here is that all peer-to-peer lending websites have a long, long way to go before they are clear on the costs to lenders like you and me.

It's the one major area where they are letting us down. Read more in There's No Such Thing as “No Lender Fee” and The Hidden Peer-to-Peer Lending Costs.

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