Mass adoption of P2P lending could boost UK economy by £32bn

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MASS adoption of peer-to-peer lending could inject £32bn into the UK economy, according to a new report into alternative finance.

Liberum Capital estimates that every household in Britain would be £10 better off every week if they rejected traditional banking.

Peer-to-peer lending cuts out the middle men by connecting savers and borrowers via online lending platforms in a process known as disintermediation.

Liberum, a London investment bank, reckons the model is ten times as efficient as banking with its heavy fixed costs associated with branch networks, large headcounts, legacy IT infrastructure and big capital requirements.

Cormac Leech, a financial analyst, told The Yorkshire Post that peer-to-peer lending can offer better returns to savers and lower charges to borrowers.

He said: “The banking industry is no more efficient today than it was in the early 1900s.

“You would have thought it would be easier to move money around today than it was a hundred years ago.”

He argued that the lack of economies of scale in the industry points to an oligopoly.

Mr Leech said peer-to-peer lending and associated automation would make the millions of people currently working in the highly inefficient financial services industry available to work elsewhere in more socially useful professions like teaching and healthcare.

He added: “It would redeploy resources equivalent to £32bn into the wider economy. People would have more disposable cash. Everyone would have £10 to spend on other stuff.”

The challenge though is awareness of peer-to-peer lending.

New consumer research from Liberum shows that 65 per cent of UK adults are still unaware of the model and only two per cent have actively invested to date.

But the bank expects public participation to increase once peer-to-peer loans become included in tax-free ISAs, a move expected over the coming year.

Liberum estimates that participation rates could increase from 2 per cent to 20 per cent over the next decade based on current rates for cash and equity ISAs.

Currently, 50 per cent of the public have cash ISAs and 14 per cent an equity investment account. Liberum said supportive Government changes, including regulation of the sector by the City watchdog, are making peer-to-peer lending more attractive to investors.

It added that the forthcoming flotation of Lending Club, the number one credit market place in the United States, will raise awareness further and bring peer-to-peer lending closer to mass adoption.

Mr Leech said the main challenges facing the sector are inertia – “older people are slow to adapt to new opportunities” - and possible misalignment of incentives.

He explained: “Regulation by the Financial Conduct Authority partly solves this problem but it would be helpful for the platforms to also be risking a small amount of their own capital side by side with lenders– say one per cent - to align incentives.”

Peer-to-peer lenders issued new loans worth more than £500m in the first half of 2014, according to the industry body.

The aggregate rate of flow of funds through these platforms has doubled over the last six months, said the Peer-to-Peer Finance Association.

Nick Moules, spokesman for Rebuildingsociety, said the Leeds-based lender “has trebled in 2014, in terms of loans created, active lenders and funds advanced, so I would expect awareness and participation to grow further, particularly with ISA compatibility on the horizon”.

It has advanced more than £3.75m to 76 businesses and has nearly 700 active lenders, he told The Yorkshire Post.

Businesses and consumer can rely on each other, not the banks

Peer-to-peer lending is bringing much-needed new competition and choice to the UK banking market in providing funds to creditworthy individuals and businesses, according to the industry body.

The Peer-to-Peer Finance Association said businesses and consumers can “rely on each other” for lending and borrowing services.

The largest P2P markets are the United States ($2.4bn), China ($1.9bn) and the UK ($1.4bn), according to Liberum Capital.

The investment bank expects competition to intensify in the sector as Google, Amazon and Facebook weigh up opportunities.