On 1st October Julian Wells, in his consulting role as marketing director at rebuildingsociety.com, spoke at the Financial Services Expo in London. Here’s a summary of what was covered.
It took commercial television 13 years to achieve 50 million subscribers. Internet Service Providers reached the milestone in 3 years, Facebook in 1 year, and Twitter took just 9 months. The pace of uptake of new technology has accelerated phenomenally and this has been fuelled by the introduction of ‘social technology’.
One in five hours spent online is now spent on social networks, and businesses are starting to see the benefits. McKinsey has stated that 70% of companies now use social technologies and 90% of these have been able to report a business benefit. The consultancy has also claimed that social technologies have the potential to raise productivity by 20 to 25%, which is certainly enough of an incentive to push businesses to overcome their reservations in terms of sharing information, and protecting their intellectual property and reputation.
But what influence will this all have in the financial sector? Rob Sauber of Prosper has been quoted as saying “The changes in financial services that are happening now are happening more quickly and dramatically than anything we’ve seen over the last 100 years”
That’s certainly true, and one of my favourite sayings about the social era is that ‘it has never been easier for businesses to fail’. Shortcomings in customer service, systems problems, data leaks – any bad news now spreads like wildfire across social networks. The reputational damage can be huge, and big businesses are still getting to grips with the speed these things happen. There is now little time to stop and plan about how to handle a situation, you must think on your feet.
From a consumer perspective, however, it’s an exciting time. Society has become more collaborative and open due to social technology, and technology in general has become smarter and more able to open up opportunities to do things differently. Peer to peer finance is the best example of this, whereby consumers are now able to come together with each other or with businesses to get a better deal. Lending, insurance and currently exchange are sectors of the market where peer to peer has made strong inroads in recent years.
There are words of warning for consumers too however, as recently articulated by Richard Carter of Nostrum Group: “Consumers need to learn that everything they put into the public domain is going to be used to judge them in future, whether they like it or not.” It’s highly likely, for example, that social activity will form part of lending decisions made by lenders in future. If someone is highly active on social media then they should, in theory, be easier to contact if they default on a loan than someone who has no presence at all and is ‘hard to find’. So it’s highly likely there will soon be more reasons to have a Facebook account than simply to keep in touch with your friends and family.
The peer to peer lending market has been one of the most exciting and highest profile areas of the new emerging FS sectors. The sector is enjoying exponential growth and although less than £1bn has been lent in the UK to date, a recent report from Nesta predicts it could be worth £12bn per year. The main drivers of this growth are likely to be awareness and regulation.
Awareness has been increasing and there has been plenty of media coverage, but there is still a long way to go. In 2012 there was a £4bn reduction in lending to businesses in the UK, yet research has shown that 70% of business owners have never heard of peer to peer lending as a funding option available to them.
Regulation is coming to peer to peer and the FCA will be taking responsibility for the sector with effect from April 2014, albeit it will take longer than this for the new regulations to fully come into force. Regulation is recognition of the disruption peer to peer has caused in the FS industry, and will bring more protection for borrowers and lenders. From an adviser perspective, it will put peer to peer on a level playing field with other investment/lending products. One in four consumers has said they would lend to UK businesses when the sector is regulated, which is hugely encouraging for the sector.
Take up is already strong with the providers already operating in the peer to peer market, and the product is very accessible. With rebuildingsociety.com for example, the loans made by individual investors currently range from £10 to £300k. Investors are encouraged to spread their lending across multiple loans, to spread the risk. Businesses are able to apply for loans from £5k to £250k, over terms ranging from 6 months to 5 years. The vast majority of applications received are via advisers, demonstrating that there is a strong role for the intermediary to play in this market.
So what does the future hold for peer to peer? We have already seen the start of the sector becoming more fragmented, with providers coming to market with a focus on a specific lending sector, geography or demographic. Some providers, including rebuildingsociety.com, are making their platform available on a white labeled basis to help enable this fragmentation to take place. At the other end of the scale, we’ve also seen an increased interest amongst institutional investors, which looks likely to drive up the average loan sizes made by peer to peer lenders. As the sector matures, returns are likely to stabalise and the marketplace will also increasingly become a global one.
There are without a doubt exciting times ahead for peer to peer lending, an innovative sector that has been made possible by the advent of the social era in finance.