After the dust has somewhat settled on a tumultuous few months in British history, the cold reality has hit home – Britain will be leaving the EU. Many will feel like they are victims of circumstances out of their control, affecting both their normal day-to-day dealings and their ability to financially plan for the longer term. Savers, investors and business owners in particular are still feeling hard done by and many look likely to suffer the consequences of an exit from the EU with savings rate reductions and the potential economic growth reductions still forecast for many years to come. However, it shouldn’t be all doom and gloom, and I’ll address how peer-to-peer (P2P) finance has emerged as one of the few true “BrexitProof” solutions to the doom, uncertainty and confusion.
There proved to be no reason to over-react following the vote. History shows that even major market movements will register as mere ‘blips’ years from now. Nonetheless, there are still many potential risks of the vote and very significant changes affecting businesses are looking probable.
Political and market uncertainties are currently not only testing the traditional banks but also the P2P lending market. However the P2P industry has matured and developed to not just survive severe testing of the banking system, but to thrive during uncertain times. As a result, the leading players in this market are stable, secure and in a prime position to capitalise upon the many opportunities that the lead up to Brexit presents.
The recent Bank of England rate cut hit savers particular hard, and savings accounts are certainly no longer a viable proposition for those looking to grow their assets and produce a sensible income.
Since the last economic downturn, savers and investors have been increasingly turning to alternative finance products. An example has been Peer to Peer lending and investing that is thought by some to be less geared to external factors than, for example, banks, and also less geared to the undulating confidence that we will continue to experience during the Brexit transition period.
Using the same stress testing methodology as used by the banks, our own business has demonstrated the potential for our secured lending book to weather the worst-case Bank of England recession forecasts, whilst at the same time avoiding the drastic lowering of interest rates payable to investors that have already hit bank savers. There are several reasons for this relative stability of rates for both investors and borrowers. The comparatively low overhead model of P2P lending is one, however the significant factor is that P2P is usually able to offer fixed rates to investors that are not linked to base rates and that get more attractive as base rates fall. This permits P2P lenders to lend based purely on credit assessments of borrowers and higher Probability of defaults in uncertain economic times can be addressed by raising borrower rates to cover Expected Losses (ELs) whilst still paying lenders a healthy interest rate.
The result is that that funds should continue to flow through P2P platforms because they can potentially provide investors with a higher return than leaving cash in a bank savings account, albeit not with all of the same protections. As we have experienced with past downturns, recessions can effectively increase borrower demand for P2P when banks reduce their lending and risk appetite and that benefits investors with higher rates than bank savings accounts whilst also being able to mitigate any increase in ELs. P2P interest rates for investors are also often fixed rate and that may be attractive to many, especially with talk of even lower bank savings rates (even negative ones) to come.
For businesses looking for short and long term loans, the vote to leave the EU was not the scenario many envisioned. Fixed rate loans offer businesses a stable way to predict part of their finances – regardless of external market conditions. Brexit may put pressure on banks to reduce loan availability due to the way they are funded and regulated but many alternative finance providers, and particularly the major P2P lenders, will continue to offer fixed rate loans as they currently do as their source of capital, retail investors, look to lock in good lending rates in a falling interest rate environment.
In most instances, loans are much safer for a business than overdrafts because banks cannot withdraw them on short notice and the large scale reduction in overdraft facilities is likely to continue at an even faster rate now given their high bank capital requirement, driving more businesses to consider business loans to provide them more stability at a lower cost. P2P firms have been replacing expensive overdrafts for some time and this is expected to continue.
At face value, the Brexit result had the potential to put our financial services industry into free-fall with commercial property funds closing for redemptions and banks battening down the hatches and cutting back lending whilst at the same time slashing savings rates. We will now see if the huge focus on increased capitalisation of banks has achieved its financial system stability aims and so far that looks likely, even if it doesn’t stop all of their reaction to the turmoil such as reducing what they see as riskier lending to SMEs.
P2P lending is considered by many a strong potential “BrexitProof” option for both investors and borrowers, and a way to circumnavigate the more traditional and highly geared banking system. Established platforms with good credit underwriting should be able to withstand changeable conditions, market uncertainty, lack of confidence and a whole host of other external factors that tend to cause havoc across the traditional banking model.