Will the rise in peer to peer lending end in tears?

Will the rise in peer to peer lending end in tears?

Posted by Pete Loughlin in Financial Supply Chain Management, Supply Chain Finance 29 Jan 2013

In 2012, the supply chain finance debate became louder and more relevant to more businesses. It’s been described as the perfect storm – the combination of constrained liquidity and very low interest rates means that the gradient between the business “haves” and “have nots” has become steeper – and banks and investors love steep gradients.

Supply chain finance is not new but new approaches are emerging based on new and innovative use of technology. In the past, the banks were the only players and they would only play with the big boys. For it to be profitable, the numbers had to be big and the cost of entry was high. But now, as collaborative supplier networks and the associated technology have matured more complex deals can be managed and the cost of entry has plummeted. Increasingly, businesses as well as individuals are turning not to the banks, but their peers for financial support.

The demise of the banks

Purchasing Insight logoSome people think I have a downer on the banks. It simply isn’t true. I do however believe that the banks developed inordinate power before the global financial crisis. Businesses benefited – or at least it felt like it at the time. We now find ourselves trapped in a situation where businesses cannot operate without banks and bank can’t, in many cases, do anything for business. And it will get worse as the requirements of Basel III make it even more difficult for the banks to support business.

Banks need to learn to make smaller profits. I’d like that to be so that they can do more to support business and help them thrive through hard times but my concern is that the tighter regulation will absorb any flexibility released by lower margins.

Peer to peer lending (non-bank lending) is growing rapidly. It’s thriving because it’s filling a vacuum but it could end in tears. We’re going from a moderately regulated market that got out of control to a market so tightly restricted that it can barely operate. It’s not surprising that a new unregulated market pops up.

Regulation is good. A straight jacket is bad. We should leverage the power of cash rich businesses and individuals to support cash constrained businesses and individuals but doing that in a controlled way will require imagination.

Pete Loughlin can be found on twitter @peteloughlin

  • Vishal January 31, 2013 at 5:10 am /

    Interesting article. Thanks, Peter, for sharing the a glimpse of what the future might hold. A few live examples of peer-to-peer lending would be nice. Even the names of countries and industry sectors would help in case naming specific companies is an issue. Many thanks.

  • john mardle January 31, 2013 at 8:56 am /

    If peer to peer lending is deemed as customer to supplier or even supplier to supplier then look no further than Vodafone, BT, Rolls Royce to name but a few. If peer to peer is where you are are legally ‘owned’ by an an organisation but receive financial services then VW, DHL and many German organisations could be included.

  • Louise Beaumont February 3, 2013 at 8:20 am /

    Peer to Peer lending is one of those catch all terms – it can mean either consumers lending to business (you can do so on Funding Circle for £20, for example), or it can mean a far broader range of investors (funds, family offices, cash-rich companies, high net worth individuals, asset based lenders and the like) lending to companies.

    Platform Black does exactly this – we access new sources of liquidity by giving them access to a new asset class of short term highly liquid debt (30,60,90 day debt) with excellent returns – in the last month we delivered net annualised returns reaching 22%. We do this by enabling SMEs to auction their invoices (setting all the parameters) on our trading platform. Investors bid DOWN on the cost of finance – and thus SMEs get competitively set cost of finance (the lowest was 50BPS for 30 day debt, in the last month), while investors make a good return (after all, leaving the money in the bank is losing them money).

    We’re leaders in the Alternative Finance movement – and we’re engaged with a number of conversations about regulation, as well as being members of the Asset Based Finance Association. We’re all for appropriate regulation!

  • Louise Beaumont February 3, 2013 at 8:21 am /

    Forgot to say – happy to talk anyone through Alternative Finance, it’s a big subject, and one we’re writing the book on, at the moment.

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