Is a busier marketplace better for Peer-to-peer lending?
Peer-to-peer lending is a growing trend in finance. The flexibility and speed with which P2P services work means lenders are taking over more and more of the lucrative consumer finance sector. The appeal of P2P lending and the increase in consumer trust of this innovative financial sector has led to an upsurge in peer-to-peer investment, with many savers turning to lending platforms as an alternative to their high street banks.
This dramatic increase in the amount of capital being invested in P2P platforms has had a knock-on effect throughout the market, with platforms like Zopa restricting their products to new investment. It’s easy to understand why – the platform doesn’t magically generate money, and relies on borrowers taking out loans and paying interest in order to generate a profit. If there are more lenders than borrowers, the returns generated through the platform will be spread thin, and investors won’t get the returns they’re looking for. The consequent drop in interest rates could see lenders abandon the platform, something that Zopa is understandably keen to avoid.
More Money, More Problems?
On the face of it, more money circulating through the system is undoubtedly better for peer-to-peer lending as a whole. More customers means more revenue for the P2P platforms, and with many big players getting involved peer-to-peer finance is quickly becoming a widely trusted investment. Overall, P2P lenders stand to benefit from a busier marketplace because it gives them a greater share of the market and much more visibility.
However, it’s important for lenders to ensure that the delicate balance of the market is maintained in order to avoid an over- or under-supply of capital. While banks are controlled to some extent by the Bank of England, P2P platforms have much more influence over their position in the marketplace. They must be careful and adept at managing the ratio of lenders to borrowers, or peer-to-peer finance platforms could potentially become a victim of their own success, failing to match the returns on offer from mainstream banks. With an eventual increase in interest rates likely to occur within the next 18 months, the ability of P2P lending to outperform banks might be put to the test in the near future.
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