I loved this comment from John Kay in the FT this morning on the regulatory challenges peer to peer (P2P) lenders are beginning to face:
Some of the new P2P lending and equity crowdfunding services will survive, operating in a more closely regulated environment and developing their own skills in vetting projects and assessing their suitability for their investors. Of course, such institutions once existed. They were called banks.
So true. And so neatly put. And in itself a damning indictment of the whole current financial intermediation business that P2P challenges.
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Indeed -banks should be facilitators not the ‘vampire squids’ sucking the life out of the economy that they now are. The trouble is that even if large numbers of people took there accounts away from banks it would make no difference to them (the banks) as there money is made by the use of ‘exotic’ financial instruments -the high street bank itself is a mere ‘front’ and one they can probably dispense with and still survive.
I have no problem with P2P lending – after all it has existed since time immemorial. Borrowing from friends and family etc will often prove cheaper than banks, who are forced to aggregate their risk in a way P2P’s don’t.
I would however, just remember the risks involved too. Banks have lots of experience in credit risk manangement, and they often get things wrong. I’m not convinced P2P lenders will have the size or expertise to manage those risks properly and still remain cheaper than the banks.
That’s why diversification is normal
I have been with Funding Circle for nearly four months now and am very pleased with it, a very well run site. It seems to me that the type of loans which I am making (as a very small part of a syndicate) are ones which banks would have made 10 years ago. I did enjoy having a free lunch from Lloyds a few years ago whilst they explained they were still open for business. However I did not believe them then and do not do so now, otherwise Funding Circle would not exist.