Although different players in the Peer-to-Peer lending market are moving at different rates - and not all are going in the same direction - there are signs that in some areas at least mainstream banks and the leading P2P lenders are converging, if not yet merging.
Following the Bank of England's post-Brexit Base Rate cut to 0.25% last August, a number of P2P lenders have reduced their lending rates in order to compete better with the banks. Notably, Funding Circle, the leading P2P platform for small business borrowers, cut rates for the highest quality borrowers (those rated A+ and A on its risk scale) last autumn, presumably because these are the businesses most likely to be able to secure bank funding instead of a P2P loan. More dramatically, Zopa, the original P2P lender that started off specialising in prime consumer credit and now lends to sole traders and small businesses too, has announced it will apply for a banking licence. This will allow it to take deposits and offer customers the protection of the government's deposit guarantee - unlike those who lend their money via its P2P service without this protection. Not surprisingly, Zopa and others have also cut the interest rates they pay to lenders to preserve their all-important net interest margin.
What's the message? There are several: P2P, especially lending to businesses, is no longer just about serving customers the banks don't want. Increasingly, the banks do want them and the are now more prepared to compete for business by offering unsecured loans with rapid, online application processes. Price competition is therefore becoming tougher. Which in turn means that P2P platforms must find ways to reduce their cost of capital. Cutting returns to lenders and becoming banks so that they can harvest cheap retail deposits are two of the more obvious ways to do this. Will 2017 be the year when Alternative Finance becomes Convergent Finance? It looks to be on the cards.
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