P2P Money Blog

Today I received an intersting email from Dave, one of the blog's readers concerning recent events on Funding Circle.  These thoughts have been echoed elsewhere on the Zopa forums, so it certainly isn't unique.  I've published this email removing any personal information.

I am concerned that the spirit of P2P lending through Funding Circle is being undermined by a significant number of individuals, with sizeable amounts of money to lend, placing multiple bids thereby killing off any chance of small investors getting a look in.

Having worked in industry for 45 years, I am familiar with the cut and thrust of business and consequently I appreciate that FC is a serious business and not just for fun. However, the actions of those making multiple bids is little different to the banks, in fact I would not be surprised if some of these individuals turned out to be bankers or other City types.

For example, I highlight the 70 bids, each of £100, totalling £7000 placed at 20:49 22/03/12 on loan request 1080.
This is simply not in the spirit of P2P lending as small investors simply don’t stand a chance against these “City Boys” and the glowing reports in the press and media about Funding Circle and “ethical” lending are rapidly becoming a joke.

Surely this is against the spirit of P2P lending and will result in a loss of small investor confidence in Funding Circle?

Thanks Dave for your email.  I too have noted a large number of bids on new loan requests, so within the space of a few hours a £100,000 request can be fully met, and lenders are then bidding against each other.  This is not too dissimilar to what happened on Zopa a few years ago.  There were a few lenders that were offering tens of thousands of pounds and they were effectively setting the rate for everyone else to try and beat.  On one level, this is simple supply and demand.  As the supply increases the rates will drop.

If some large lenders come in and offer £10,000 at 12.5% then there is still room for the small lender to undercut them at say 12.4%.  The rate will settle at the value at which lenders are not willing to go below, and which borrowers are prepared to pay.  This is the zone of possible agreement.  Some lenders will have a lower minimum than others and hence will be unable to make any loans where there is a plentiful supply.  So yes on one level, it is squeezing out the smaller genuine lender.

I have to be honest here and state I have been one of those people putting in multiple offers (although I've never worked in banking and the nearest city to me is Exeter).  Why would someone do this ?  Some companies are happy to have to loan early, so can accept at any time after it is fully funded.  If I'm successful I will usually go on to sell some or all of the loan parts.  If I can get a loan at say 10% AER and then resell it at say 9% AER then I'm making a small profit.  This difference is limited to a maximum of 3% on Funding Circle.  While the profit could be around 1% after fees, you would have only had to tie your money up for a few days.  If you compound that rate over a year, even allowing for periods when the money is sitting in the holding account, that would still be a good return.  This method only works if there is a market for the loan parts, and Funding Circle have probably the best secondary market of all of P2P companies.  This could also backfire as the lender's diversification may be very low, and one default could wipe out a lot of money, but I perceive this to be of low risk, especially within the first two months.

My outlook on Funding Circle is slightly less favourable than Zopa and RateSetter currently, only because Funding Circle have done an amazing job attracting a large number of lenders and rates have significantly fallen.  There is therefore a market of markets with rates rising and falling on each.  Check out RateSetters 7.8% return after fees over 5 years with much lower estimated bad debt, and with the additional protection of a provision fund.  Also check out the rates on Zopa on a weekend.

In summary, and in answer to your points, yes I do believe this can have a negative effect on Funding Circle, but it will also balance out over time as some lenders move away until demand increases further or supply reduces.