Peer-to-peer lenders should not fear APRs
- 04 Aug
Following the Competition and Markets Authority's (CMA) announcement that the new pricing rules on business loans will not apply to peer-to-peer lenders, some are heaving a hefty sigh of relief, while others are viewing it as an opportunity missed.
In case you missed it, from 2 August 2017, all providers of unsecured loans and overdrafts of £25,000 and less to SMEs must calculate and clearly display the annual percentage rate (APR) of their loans. The aim, of course, is to provide clarity as to the true cost of borrowing and make comparing one provider against another easier.
Many P2P lenders will dodge the bullet by only offering loans of more than £25,000. Most do this already to avoid the rigours of the Consumer Credit Act, but I question whether this is the right attitude.
The positives of displaying APRs
The P2P sector quite rightly prides itself on transparency. Individual platforms vary in terms of how information is presented, but, for the most part, borrowers know the rate of interest they will pay on a loan and investors know the return they can expect to receive for risking their money. Both sides are also clear about what they must pay in the way of fees and charges.
So, displaying the APR should be a relatively small inconvenience while encouraging competition and potentially putting downward pressure on interest rates for borrowers. At the same time, it will help P2P to be compared against, and considered part of, the mainstream. From a marketing perspective, therefore, there are many positives.
Impact on lenders
Some will argue that a scramble to offer the best value loans to borrowers will make the challenge of attracting investors even harder.
The conundrum for P2P businesses is how to offer competitive interest rates to borrowers (i.e. as low as possible) while at the same time being able to provide investors with an interest rate that is attractive (i.e. as high as possible). The two are at odds and to manage the margin between the two rates is a delicate game. This is not the same for the banks, which are able to give depositors around 1% while charging, say, 18% to credit card borrowers – they have much bigger margins on which to feed.
In many ways, this is the essence and the beauty of P2P lending – it is an interest rate driven entirely by market forces and devoid of any of the balance sheet manipulation of the major institutions.
The pros outweigh the cons
Time has shown that, because financial casualties in the P2P sector have been relatively few and interest rates available from the traditional deposit takers have been so poor, investors have, in good number, accepted the risks of P2P in order to secure the returns available. With many platforms launching Innovative Finance ISAs, these rates are made a whole lot more attractive for investors who stay within the annual £20k ISA limit.
All of this should mean that a little downward pressure on interest rates as a result of them being more visible should not irreparably damage the returns and attractiveness of P2P lending to investors.
Even if the CMA doesn’t mandate the publishing of APRs, it would still be a good idea for the industry to do so voluntarily – whatever the size of the loan. Apart from highlighting competitive advantage, it will generate some positive publicity for a financial services sector that is always keen to show it is prepared to innovate and put the needs of customers first.
- 11 Aug
We suspected that the Bank Referral Scheme was going to be a slow starter when, five months ago, The Marketing Eye asked the Treasury’s Press Office how it was getting on. Despite the fact that no...
- 05 Jul
Peer-to-peer lending has reached a significant milestone since Zopa launched the world’s first P2P platform in 2005. Over £10 billion has been cumulatively lent across 23 UK P2P platforms....
- 23 Jun
Good to hear that the pre-eminent pioneers of P2P lending in the UK are receiving formal recognition for their outstanding achievements. Described an a ‘Peer to Peer and Financial Inclusion...
- 05 Jun
Liberis, the card based finance provider, has announced an integration with Xero, the UK's leading online accounting software, to improve small businesses’ access to capital and credit....
- 25 May
Soaring levels of consumer debt are evidently causing the Bank of England, the Government and others in authority some sleepless nights. According to a recent report in The Guardian, the number of...
- 24 May
Sage Pay has teamed up with alternative business finance provider, Liberis,to give Sage customers access to flexible financing for the first time....
- 24 May
ArchOver, one of The Marketing Eye’s longest standing clients in the alternative finance sector, has been granted full authorisation by the Financial Conduct Authority (FCA). The news represents a...
- 10 May
The latest Budget statement from ‘down under’, on May 9, reaffirmed the Australian Government’s intention to turn the continent into a global fintech centre....
- 15 Apr
Kids, they say, grow up quickly and nowhere is this more true than in FinTech. Barely five years ago, the phrase wasn’t even invented. Now it is the collective noun for billion dollar enterprises,...
- 30 Mar
One of the recurring themes at this year's AltFi Europe event, organised by the excellent AltFi team, was a quest for the definition of a bank, or more particularly a bank of the future. Is it any...