Yesterday Lord Turner, former FSA chairman, issued a stark warning against peer-to-peer (P2P) lending, saying that “the losses which will emerge from peer-to-peer lending over the next five to 10 years will make the bankers look like lending geniuses.”
Indeed the contrast between the intricately regulated, highly capitalised banks and nascent P2P lenders could not be starker. It beggars belief that banks are being pressed to shore up seemingly infinite amounts of capital, while crowd funders and P2P lenders need no capital reserves at all. Any loss will fall on those who choose to take the risk of placing their money with them.
But are these nuances visible to the most important players in the UK economy – namely the small businesses that rely on these funding sources? I doubt it.
The reality is that there is a broad spectrum of funding available to small businesses. Starting with the traditional bank loan, through to independent financiers supporting SMEs’ cashflow needs with strong relationships, and finally the transactional funding models offered by P2P lenders and crowdfunders.
Even amongst P2P lenders themselves, there is variety in what is on offer. These lenders aren’t all apples – they are an amalgamation of apples, pears and bananas. Some P2P lenders undertake significant due diligence on the companies they invest in – fully managing credit underwriting referred to by Lord Turner. Others conduct perfunctory due diligence, agreeing to fund almost any business and take-on even the least sophisticated of investor without sufficient warnings of the associated risks.
What are SMEs meant to make of this funding minefield?
The Financial Conduct Authority’s Discussion Paper on SMEs as users of financial services poses the interesting question of whether small business owners and decision-makers should be treated as consumers, and thus subject to the same protections. However, questions posed by cases such as Crumpet Cashmere and Rebus, which made national headlines recently, are much less about protecting small businesses and more about protecting investors.
In its present state of development, the P2P sector is largely ‘execution-only’ – meaning that it is based solely on transactions. We cannot expect an automated online platform to understand a business’s full range of needs, circumstances and requirements – nor can it form relationships.
Competition and choice for SMEs are always welcome, but P2P lending has a long way to go before it can position itself as a credible and durable form of funding over an economic cycle. I believe there is room in the market for P2P lending to develop, so that it can play a real role in small businesses’ development – demonstrating its worth as a social good, not just a facilitator.
The statement made by Lord Turner poses considerable questions for the former darlings of politicians, government and media alike. With it I hope to see a more honest and open debate emerging about the role of online platforms in funding small business growth.