The industry has matured to withstand the end of historically lax monetary policy, P2P lenders say. Other players in alternative finance are also following what the central bank will do.
The Bank of England’s decision to keep the interest rates at 0.5 per cent should at least make peer-to-peer lenders smile. People are tempted to look for alternative and riskier ways to increase the value of their savings, as inflation continues to hover above BoE’s target of two per cent and traditional savings accounts offer barely any interest at all.
Mike Allan, the director of operations at LendingCrowd, said that the historically lax monetary policy created an opening for P2P lending to take off.
“I do think that the historically low base rates we’ve seen since 2008 have increased awareness of how poor savings rates are compared with inflation. This fact, combined with the challenges that small businesses have faced in securing finance from traditional sources, has helped the growth of the P2P sector,” he said.
Allan emphasised that he thinks the P2P model can work “in any economic environment, whether inflationary or not.” He forecasted that it will take several years before the BoE’s base rate will climb anywhere near the 5 per cent level last seen a decade ago. But even a return to those levels would not destroy the booming P2P sector.
“Fundamentally, all that would happen is that investor and lending rates would go up. P2P investing would still outperform cash in a higher interest rate environment.”
Stuart Law, the CEO of Manchester-based Assetz Capital, agrees:
“Peer-to-peer lending certainly benefited in its early years from the low yield environment but the industry is now much more mature, so interest rate hikes pose significantly less of a theoretical danger.”
Law doesn’t believe that BoE will raise rates much in the coming years and said that he would be “slightly surprised” if the rates even reached two per cent in the next two years.
“The Bank of England is making headroom so that it can cut the rates when the economic conditions change for the worse.”
Stuart Lunn, the CEO of LendingCrowd, believes that the current interest environment continues to lower the threshold for people to try out new methods of saving.
“For those seeking an alternative to cash savings, peer-to-peer lending could be the answer,” he said. “Our platform instantly creates a diversified portfolio of business loans with a target return of six per cent a year.”
Other companies working in fintech are also monitoring the Bank of England’s decisions. Norris Koppel, the CEO of challenger bank Monese, said that the rate freeze was logical and didn’t come as a surprise.
“Of course, by delaying the hike this time around – we could be in store of a sharper increase further down the line to compensate. I’d be surprised if we don’t see an increase in rates in August once the slow start has passed,” Koppel said.
He said that Monese is well-equipped to deal with the rate rises as its customer base differs greatly from traditional banks and it doesn’t have any products that pay interest.
“Our customers don’t typically have tens of thousands of pounds in savings. They put want to put small amounts of money in a safe place. We are attracting freelancers and other people who are moving between countries and need to have a flexible way to deal with their finances, which is why the general economy and central banks have less impact on us.”
Online mortgage broker Trussle and its customers are more affected by the monetary policy. Ishaan Malhi, the CEO, said that a rate rise seems “imminent”.
“With the Bank of England hinting there could be multiple rate rises on the way, anyone coming to the end of their initial deal should look into switching to a new deal sooner than later."
21 March 2023
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