Critics of the UK's peer-to-peer lending platforms (P2P) say they work today, but what if interest rates rise? What about a downturn in the economy. The skeptics want to see how peer-to-peer performs through a few business cycles before they join the crowd.
If industry analyst David Stevenson know what he's talking about, we could be a long time dead before that happens.
We all need to get used to interest rates well below historical norms for the next few DECADES.
So what are the implications for peer-to-peer lending, and lending in general? Stevenson's article in Alt-Fi News today is his assessment of the implications of low interest rates on the alternative finance sector via a model for how regulation, technology and markets interact.
That's ambitious. But why does he believe in low interest rates? Because the UK and other western economies are all addicted to cheap debt, and if governments and central banks try to end that addiction too quickly, it will cause all kinds of turmoil, asset price crashes and social disruption. His article makes difficult reading until you realise his argument is this is what governments will refuse to do.
The interesting question, therefore (if you accept Stevenson's premise) is how will the alternative finance space adapt to sub 2.5% rates for most of the next few decades?
Interesting idea number one:
" If central banks can’t control credit growth through their balance sheets and interest rates, they’ll pass the buck to regulators such as the FCA. These bureaucrats will force lenders to tighten borrowing criteria, shutting out huge swathes of the market from access to cheap money. We’ve already seen it in mortgages, and I think it will come to unsecured lending within the next few years. Proper KYC around a client's creditworthiness will be combined with new regs stopping automatic credit level increases and interest-free deals."
Many of these predictions - and the buzzwords - speak to Another Crowd's memories of how the banks got into such a mess by over-extending credit before the financial crisis and since. We were all encouraged to borrow money to spend on anything, whether we needed it or not.
Alternative lending restores a human dimension to finance. If I want my friends, or the crowd, to lend me money, they want to know that I can repay the loan, and that the end of the deal, both sides will have benefitted from it. They don't want to offer me sweeteners, cashback, or an increase to my credit limit when I haven't asked for it.
This is the difference between banks who serve the economy by serving their customers, and banks who distort the economy by serving themselves.
Interesting idea number two:
"Whenever regulators force markets to adapt to stringent rules for core players, we see financial innovation intensify at the fringes. If investors can’t get a decent yield from core savings products, they’ll get more “alternative” – helped along by an industry only too happy to engineer new products. "
This could have good and bad effects. (And we've already seen both sides.) The good news is that well-engineered technology and well-designed procedures can move information around, so that the bureaucratic overhead gets smaller and more of the money in the system goes to the customers. This is how peer-to-peer lenders can offer higheer rates to savers, and lower rates to borrowers. They don't need toabsorb such a big spread.
Only this week, the CEO of Deutsche Bank announced his bank intends to employ more robots, and use people for work that robots can't do well.
The bad news, which Stevenson spotted, is that there will be short-term advantage for financial institutions to build and launch products that willattract investors with more attractive short-term yields, and 'pump' them until the market gets wise, or the regulator catches up with them.
We recommend the whole article for working through the implications of a future anchored in low interest rates, and lots of innovation. The future is favourable to alternative finance, P2P lending, and fintech. It's going to get bigger, and our role is to do what we can to make sure it gets better.