Argue Your Case, But Show Us Your Data

handwritten sign: bring your data

Source: Paul Downey; CC Attribution 2.0 Generic

If the banks are bad, peer-to-peer lenders are better / worse / about the same ?

Mentally choose one before you read on, please.

Yesterday the Financial Times published the opinion of another industry expert voicing concerns about peer-to-peer lending. This time, it was David Postings, the CEO of  Bibby Financial Services, who told the FT that P2P was overheating, and heading for a meltdown.  

There will be a crash sooner or later.

“We are seeing signs of overheating in the small and medium sized business lending market. Credit terms are stretched and pricing is down. It has all the hallmarks of what happened to personal credit pre-2007. There will be a crash sooner or later."

Mr Postings has a long track record of Cassandra-like predictions about peer-to-peer lending.  He predicted trouble in February, in October last year, in August, and in July.  

What concerns us is not that he might be right, but that he doesn't put forward  a shred of evidence to support his thinking. This, in our opinion, is a serious breach of etiquette.

It's important to share your evidence

Investment reporting is is not like writing film reviews. You can't just say "Hooray!", "Boo!", "I laughed!", "I cried!"  It's important to share your evidence, so that other people can understand it for themselves, and make up their own minds.

The analogy Mr Postings analogy between 2016 and 2007 begs the question: in what sense are banking and peer-to-peer lenders alike? Are they taking the same risks? Are they likely to make the same mistakes?  To quote his own blog, the world of funding is changing, and  a fundamental problem with debating comparable merits of different funding types is ensuring comparison on a like-for-like basis.

This is a topic that needs more discussion, and we intend to return to it, because we want to encourage anybody who invests, or thinks about investing, to think critically and make decisions on the best available evidence. To close, we'll repeat two points made by Professor John Kay in his excellent book,  “Other People’s Money: Masters of the Universe or Servants of the People?

  1. The assets of British banks are around £7 trillion. Their liabilities are around the same. (For comparison, that's more than four times the National Debt, which as of yesterday's budget is around £1.6 trillion.)
  2. Only 3 percent of bank liabilities are made up of lending to firms and individuals.

So, no, we do not believe that the alternative lending market is overheating - not at a couple of billion a year (Cambridge Centre for Alternative Finance, February 2016) and no, we don't expect 2016 to be anything like 2007.

UPDATE - 17th March 13:00 

Angus Dent of Archover has written a rather splendid open letter to the Financial Times about their article.