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The new Zopa lending options for savings

Zopa logo

The UK pioneer of peer-to-peer (P2P) lending, Zopa, has revamped its savings options for potential lenders like us.

These changes are another step away from how the company originally positioned its business – and from the Zopa I began sporadically covering way back in 2008.

In those early days Zopa was almost an eBay for individuals. Instead of depositing your money with a faceless and feckless High Street bank in return for a meager interest rate, why not lend it to somebody you didn’t know for a much higher return?

Heck, it worked for backstreet moneylenders for millennia…

Well, one reason to be hesitant might be because that somebody could be as faceless and feckless as any bank.

Which was where Zopa stepped in.

Conscious capitalism

First, Zopa put a face on your borrower.

No longer were you sticking your money into the Hali-BC-land Banking Group’s “Ultra Gold Premium High Interest Account” in exchange for a pathetic interest rate.

With P2p, you were lending to Barry who wanted a motorbike, to Tracy who wanted to top-up her tan in Ibiza, and to a seemingly endless stream of people who said they wanted to consolidate their loans.

And – in those juicy days before the wider interest rate crash that began in 2009 – you were earning 7-10% or more for your kindness.

Zopa borrowers even wrote little biographies, as if touting themselves on eHarmony. Charming.

Of course Barry or Tracey could be feckless too, and so Zopa did some credit checking for you.

It argued its robust procedures meant the higher interest rate you got with it compared to a bank was mostly due to the efficiency of its Internet-enabled P2P business model, rather than because you were taking huge risks.

And bar a wobble early in the credit crisis1, I would say Zopa has performed admirably on the credit quality front.

Zopa has been running since 2005, its reputation was enhanced by its performance in the recession, and there’s been no deluge of bad debt that pessimists predicted at the outset.

But note that back then lenders also took some responsibility for what level of risk they were assuming, and hence for those potential bad debts.

As a lender you would set the minimum interest rate you were prepared to accept. Zopa’s credit checking divvied up its borrowers into buckets of increasing dodginess – but it was up to you to decide what interest rate you’d demand for each (or whether you’d bother with some bands at all).

Set too high a minimum interest rate for a particular cohort of motorbike-buyers and your money would never be lent out.

Finally, being a banker can be a lonely business, and so Zopa also offered community features. These ranged from the ability to see who else had chipped in on a particular loan to a thriving discussion forum.

Zigzagging Zopa

Throw in some portfolio analysis tools and whatnot and, in a nutshell, that was Zopa 1.0. It enabled you to Be Your Own Bank.

But Zopa has changed a lot since then – culminating in the most recent overhaul I mentioned.

I don’t propose to go through all the previous incremental changes, blow-by-blow. Others have been more much invested in Zopa than me, and I’m not an expert on the sector.

I’ve followed P2P out of curiosity and as an interesting sideshow to my true love – equities – whereas some early Zopa lenders seemed to be almost revolutionary in their hatred of the banks and their joy at having found a way to get hands-on with their savings.

Suffice to say, Zopa is now almost unrecognisable from the platform that won their hearts. I’m not saying it’s better or worse, but it is very different.

While progress over the years has followed the two steps forward and one or two back model, eventually Zopa scrapped the ability to see much about your borrowers, ditched an experiment to lend directly to individuals in size (a sort of Kickstarter for P2P), killed the community features, and in my view made it harder to look into your loan book.

Most dramatically, it removed the ability to set your own acceptable interest rates against the range of rates being offered by your peers – the very feature that gave Zopa its name (Zopa stands for Zone Of Possible Agreement).

Like some fusion chef on a budget, Zopa also merged and blended its various markets and the term length of loans it offered, further narrowing the options for lenders.

On a more positive note – in the eyes of most people – it introduced a greater measure of protection against bad debts, too.

Its so-called Safeguard fund is basically a stash of money set aside to repay soured loans, tithed from borrowers’ interest payments. The Safeguard fund had the affect of smoothing returns for all lenders in the applicable markets, rather than some unlucky lenders getting a string of bad debts while other savers were smugly blessed with an unblemished portfolio of outperforming loans.

The Safeguard protection was surely inspired by the similar provision fund at Ratesetter. Indeed evolution throughout the sector seems to be being driven by the plethora of competition that has sprung up to challenge Zopa and the other early pioneers.

This might indicate these so-called Fintech companies see abundant opportunities to revolutionize our personal finances.

On the other hand, it might imply that even older companies like Zopa have failed to erect many barriers to entry over the years, and also that it’s pretty easy to fund and launch a loss-making Fintech company.

I am not sure which as yet.

On the subject of losses, I should stress at this point the obligatory peer-to-peer warning – that your money with Zopa is NOT protected by the Financial Services Compensation Scheme, and thus even when lending under the auspices of Safeguard or Ratesetter’s Provision Fund, you could still lose some or all your money if bad debts eventually mount to outweigh the ability of these platforms to give you and your fellow lenders back all of your money.

So far with the big platforms Zopa and Ratesetter, this has been a theoretical concern rather than a reality. I had the odd bad loan with Zopa before the Safeguard came in, for instance, but the resultant losses were totally swamped by the higher interest payments I earned.

The risks are there though, and bad loans tend to snowball in a crisis, so we would expect to see a calm before any storm.

For this reason, P2P for me still occupies a different place in my portfolio to cash and corporate and government bonds. The interest rates are not 100% comparable to those mainstream alternatives.

You are taking on more risk with P2P, with no promise of State compensation if it goes wrong. This at least partly explains those higher expected returns.

Zopa three ways

At last we get to the news! (Which is in reality somewhat old, and which I’ve buried 941 words into this article. Ho hum, my style has always been more the rhomboid than the inverted pyramid!)

Sign up with Zopa today as a lender and you’ll be confronted by three options:

The new Zopa: Marketplace lending for the masses?

The new Zopa: Marketplace lending for the masses?

This is a far simpler menu than old Zopa at its most complicated. As such I think it’s designed to win more mass-market money to the platform. There’s a small nod to the diehards with the Plus option, but I don’t know if it will be enough to win them back.

The choices are fairly self-explanatory.

For all three options your money is as usual divvied up and spread out as micro-loans across various new Zopa borrowers – with a larger minimum lump sum demanded to enter the Zopa Plus market, on account of the greater risk. And you no longer lend money for a term you specify, regardless of which option(s) you go for.

You can withdraw borrower repayments for free with all options. In my experience a fairly high portion of borrowers actually repay their entire loan early2, which has up to now meant that over a period of a few months you can get a fair chunk out if you want to.

The key differences between Access, Classic, and Plus are:

  • Zopa Access and Zopa Classic money is backed by the Safeguard fund3 whereas Zopa Plus is not. Which partly explains the higher predicted interest rate for Plus.
  • Zopa Access and Zopa Classic money is lent to better-rated borrowers than Zopa Plus, which takes on riskier customers. This explains the rest of the higher interest rate for Plus, compared to Classic.
  • You can sell your entire loan portfolio with Zopa Access for no charge. That makes it more liquid (but see below).
  • For Zopa Classic and Zopa Plus a 1% fee is charged on loan sales, should you decide to withdraw your money before your loans have been repaid.

Note that the fee you’re charged to sell your loans may not be the only financial hit you have to take, should you choose to cash out early.

This is not made super clear in my opinion, but anyway you will only be able to sell your loans at the best price you can get for them at that time.

Ideally, a fellow lender would just take over your portfolio. But if interest rates at Zopa Access rise to 6%, say, then a portfolio that you accumulated when rates were below 4% will not be very attractive to potential buyers, who could lend into the new customer market instead and get a higher rate.

This means you would probably have to take a haircut to find buyers for your portfolio.

(In contrast, if you sat on your loans and waited until they all matured then you would expect to get all your principle back, with interest).

This is definitely something to be aware of, especially if and when interest rates start to rise.

What makes a market?

Boil it down, and Zopa Access is for P2P dilettantes, Classic is for people who want to keep money compounding with Zopa for many years to come, and Plus is for risk-seeking daredevils who trust the platform’s credit checking and resent seeing the Safeguard fund eating into their returns.

Plus then looks like a gesture towards those who were comfortable with the original P2P Zopa model. There’s no ability to set your rates or decide who to lend to though, so to be honest it’s sort of a disinterested Royal wave of a gesture, as opposed to a bear hug and a goosing.

At this point we could spend all day debating how these options compare to rivals like Ratesetter and the other platforms out there, and perhaps we will in the comments.

But what I’m more interested in is what it says about the state of P2P lending today.

For starters, should we even still call it peer-to-peer lending?

The term “marketplace lending” has been gaining ground for a while, and when you look at the Zopa revamp you can see why.

Yes, you’re still lending to individuals with Zopa, but you don’t really know who they are anymore. True, that was fairly useless knowledge in the past to be honest, but it did at least highlight the P2P difference.

Your cash stashed with the Halifax is also funding someone’s mortgage. Zopa may be more granular and may be more efficient but is it really that different now you’re just taking the prevailing rate you’re given, and you similarly don’t really know where it’s going?4

This same-difference seems even more the case when you consider the institutional money that has entered the P2P sector, whether through investment trusts such as P2P Global and GLI Alternative Finance, or via hedge funds and the like, particularly in the US.

I don’t have any figures for Zopa – and from what I can tell it still remains largely focused on individual savers – but you can see the appeal of institutional money for these platforms.

All the platforms need to scale fast to stay ahead of the competition, improve margins, and ultimately generate decent profits.

But scaling fast is always risky and especially so in finance, and it’s easier and perhaps safer to do it by finding a few hundred institutional investors with £5 million to spare as opposed to attracting and servicing another 50,000 finickity retail customers.

Yet however you do it, growing quickly can lead to problems. For example, the US platform Lending Club has been rocked by issues involving incorrectly classified loans, as well as by its admission that any lack of access to further institutional money could ultimately be bad for its shareholders.

The debacle is uncomfortably redolent of the subprime mortgage crisis in the US, and the still-emerging P2P / marketplace lending industry now needs to work twice as hard to win the wider public’s trust.

Only the loan-ly

As Zopa and the other P2p pioneers – and the host of new entrants – search for the perfect mix that maximizes growth without stashing timebombs throughout their operations, they will continue to evolve.

Already I think we can see that to take substantial market share from the global banking industry, the marketplace approach may have the edge over the fiddly and fine-grained pure P2P model.

This isn’t to say that there’s not room for multiple approaches – but even sector granddaddy Zopa has only facilitated £1.5bn in loans since its launch in 2005.

Compared to the £700 billion held in savings accounts, that’s not so much a drop in the ocean as a healthy bonus in some rarefied corners of the finance industry.

Hence the revamped approach from Zopa, which I believe is a bid to parlay the trust it has rightly won for itself and its longer track record into a simpler proposition for both lenders and borrowers.

Forget all that stuff about knowing your borrower’s favourite brand of biscuit. Just give Zopa the money, trust in its algorithms, and earn most of any differential that Zopa can eek out versus a traditional bank savings account.

Meanwhile the platform aims for scale, and tries to lock-in its first-mover advantage. True P2P enthusiasts can go take their chances with the upstarts.

Zopa then is not really looking to cut out the middlemen – the banks – with a radical new model.

Rather it’s now trying to replace those middlemen with itself as a middleman, with something that feels altogether more familiar.

As of last September, Zopa was not yet profitable however, which as with Ratesetter’s £100 sign-up bonus does make you wonder if it’s all too good to be true.

Z is for zeitgeist

Can Zopa achieve the scale it requires to make money?

Will banks acquire the best players before they do so if P2P does go truly mainstream – as happened with the Internet banking pioneers like Egg and Cahoot, which were acquired and then left to go cobwebby when online banking became everyday banking?

Hargreaves Lansdown is now working on its own in-house P2P platform. Hardly a plucky band of brothers seeking to upend the status quo – Hargreaves already has over 800,000 customers and more than £60 billion in assets under management.

Time will tell, but for me the shifting business models are yet another reason not to put all your eggs in one basket, both in terms of spreading your money between P2p platforms but also not putting all (or even most) of your cash-like assets – let alone all of your portfolio – into peer-to-peer lending, which I do see some people doing online.

Personally less than 4% of my total wealth is in P2P, I use both Zopa and Ratesetter, I have owned one of the investment trusts I mentioned above on and off, and I will probably try some of the newer platforms eventually – especially if and when the delayed Innovative Finance ISA options are rolled out more widely.

To quote Francis Bacon who was writing in 1625: Money is like muck, no good except it be spread around.

  1. That I was scoffed at for highlighting, but that was later recognised by at least some Zopa-heads as a short-term systemic glitch rather than just bad luck on my part. []
  2. Beware this may be due to falling interest rates over the period Zopa has been active. []
  3. For so long as there is money in the fund. This backing is not guaranteed. []
  4. You can download your loan book as a spreadsheet which has a username attached to each of your micro-loans, but this is hardly a Who’s Who? of your customer base. []
{ 26 comments… add one }
  • 1 John B June 15, 2016, 5:34 pm

    My Ratesetter investment, which I tried on your suggestion, has languished on £1k, as its rather dull, and only paying 3.8%. Funding Circle, which is a full-on pick you borrower, buy and sell loan fragments system, got £33k in the end. This was partly due to a special gift if you increased borrowing by £30k, which caused much playing the site like a gambling machine, and partly because the rates were better, 6.7% after bad fees and bad debts, which is much like Zopa Plus, perhaps unsurprisingly.

    FC seemed ever so complicated to start, but I understand it now, but its really an illusion that I can assess the Cornish property market and bid for a Falmouth renovation loan. You are so much relying on the platforms negotiators to pick the right borrowers and hassle them for the cash, I’d not drive to Cornwall in an attempt to get my £40 back. But its A to E risk assessment, with headline/default rates to match is nice, and picking the repayment period is handy, as I suspect getting your money out in a crisis could be hard, so shorter terms are appealing.

    With access difficulties, I can’t see the point at the 3.5% end of the scale, its too near the banks which are protected and will pay out on demand. So I’m more attracted to the higher end of the returns, but its hard not to be too greedy. A friend rather likes SavingsStream, but as they lend at 18% and pay out at 12% I start wondering just who their (hidden) borrowers are.

    As an aside, I wondered if there were any halfway third world p2p companies. Kiva takes your money, and pays you no interest, but the borrowers pay 35% due to the high costs of downstream intermediaries (Zidisha treat borrowers better, but rely on volunteers to handle the loans). I’m not out for screwing 35% out of African entrepreneurs , but it would be nice to have someone that paid me 3% on money I thought was doing good in Africa, even knowing it was very high risk.

  • 2 John B June 15, 2016, 5:42 pm

    PS Funding Circle lends to businesses, Ratesetter (and I assume Zopa) lend to individuals. I wonder how well bad debt rates are correlated between the 2 classes, so by choosing both sorts of platform I am reducing my risk. Similarly, how correlated are small businesses with FTSE 100 ones in terms of of risk and economic cycles. Are the loans closer to bonds than equity?

  • 3 Sharpespur June 15, 2016, 7:47 pm

    Not tried Zopa but have have used Ratesetter for about a couple of years. I targeted only about 5% of portfolio value for the same reasons you mentioned. Had a bit of a shock when I checked my distribution for rebalancing and found my allocation had crept up to about 20%. This was a mixture of the fact that equities have not been great this last 6 months and I had jut taken my eye off the ball how much I had been putting in each month (also my pot is not that big yet so that makes it easier to get out of balance just with monthly contributions over a year!).

    I haven’t taken any money out over last few months but I have directed the usual monthly investment to topping up equities instead. Across all loan periods I’m getting just shy of 5% which I think is pretty good and worth the risk.

    I wonder now these are becoming more mainstream, especially now P2P can be held in ISA, if the FSCA will one-day extend protection there too?

  • 4 charlie June 15, 2016, 11:08 pm

    As a general resource, I found the chatter at http://p2pindependentforum.com/ useful when researching P2P.

    @JohnB – RateSetter don’t just loan to individuals but to SMEs and for property too.

  • 5 weenie June 15, 2016, 11:31 pm

    Most of my P2P cash is with Funding Circle and Ratesetter but I do have smaller amounts in others (Lending Works, Fundingknight and Landbay).

    6.7% seems to be a bit on the low side for ‘risk-seeking daredevils’.

    Some of my loans with Funding Circle are in the ‘E’ risk rating and I’m getting nearly 18%. The A+ loans (least risky) are around 8%.

    Funding Circle do not have a safeguard fund but the two small losses I’ve had (two ‘C’ rated loans) have just been swallowed up by the high interest I’m getting and I hope this continues to be the case!

    P2P isn’t something I’m likely to put a lot of money into due to the lack of protection from the FSCS (funnily enough, only around 4% like you!) but it’s something different to have in the portfolio.

  • 6 The Rhino June 16, 2016, 11:35 am

    There is the hint of ‘picking up pennies in front of a steamroller’ about it all.

    I agree that it only looks interesting at the higher rates of return, at the lower end your taking a lot of the same systemic risk but just not being told about it or compensated for it.

    Did you do alright out of your ratesetter plug?

    I hope so.. maybe enough to keep you in beer for a week or two

  • 7 James Brown June 16, 2016, 1:52 pm

    I was recently looking into personal loans when I noticed that rates had gone so low (best I found was 2.7%) that I realised you could simply take out loans and in risk free vehicles (fixed year ISAs) actually make a profit even before the potentially significant tax benefits of maxing out ISAs early in life. Nothing came of it as ironically the banks are unwilling to lend to fund a risk free ISA on a perfect credit record, but are fine with taking on risky credit card debt via consolidation…

    But I digress, the main thing that shocked me was that for a period Zopa were lending out money at lower rates than it was paying savers! How is that possible? And is that not the sign of a terrifying bubble in personal unsecured debt? After my ratesetter bonus is achieved I’m planning to pull out.

  • 8 David June 16, 2016, 2:26 pm

    Can I ask a technical question about how P2P works? With mainstream banks I’m pretty sure they use “fractional reserve banking” to lend the same money they’ve received on deposit to more than one borrower, whereas presumably the likes of Zopa, Ratesetter etc can only match the same loan once. In which case, how on earth can they be run more efficiently than a bank?

  • 9 Fremantle June 16, 2016, 3:07 pm

    @David

    Reserves are for meeting the banks liabilities to depositors. Loan companies don’t take deposits – if you use p2p you’re not lending to Ratesetter et al via a deposit, but lending the money directly to borrowers who are obliged to pay back the capital and interest. P2p is not a bank and do not need to keep reserves for paying back lenders, outside of the “insurance” schemes like the Safeguard fund mentioned in the article. The p2p companies are providing a lending platform, not a banking service.

  • 10 David June 16, 2016, 3:13 pm

    @ Freemantle – thanks for that.

    So if I earn 4% as a lender and the borrower is paying 7% that means Zopa are taking a 3% cut, much of it going on admin no doubt.

    If I deposit with a bank and only earn 1% they could be lending out my money multiple times. Even if they are lending as a cheap mortgage at 2.5% that’s still 1.5% margin on each loan. If there are 5 loans that’s 7.5% margin. More admin from more loans but still a much bigger profit overall.

    So I really don’t understand why P2P is meant to be more efficient and why the rates are higher. You would think banks could afford to pay more interest to depositors and/or charge lower rates to borrowers due to the extra profits they make from the fractional reserve banking aspect of the set up.

  • 11 Fremantle June 16, 2016, 8:26 pm

    @David

    Fractional reserve banking isn’t about lending your money specifically multiple times, but about the multiplier effect of only needing to hold less than 100% of depositors money on deposit.

    Money lent by banks ends up back in the banking system as deposits. So if 40% of depositors money must be held, 60% is lent out. That 60% becomes new deposits of which 60% can be lent out, ie. 36% of the original deposit is lent out twice, then 60% of that 36% and so on. Nothing to do with efficiency, just a function of banks not having to hold all of depositors’ money as on call readily accessible cash.

    You can think of it like this, £100 becomes £160, becomes £196, becomes £218, with a theoretical limit of £250, ie. £100/40%.

    P2p lenders essentially hold no reserves, so theoretically 100% of lenders money could be re-lent if it ended up back in p2p. But of course it won’t, most will end up back in the banking system and will subject to reserve limitations on lending.

  • 12 Fremantle June 16, 2016, 8:38 pm

    @David

    ps. p2p isn’t more efficient, it’s rates are higher because the risks are higher.

    Interest rates on lending are the cost of borrowing and are separate to fractional reserve banking. Irrelevant to the rates bank charge borrowers and pay lenders, they’re limited by a need to keep reserves. Fractional reserve banking doesn’t increase profits necessarily, efficient banking systems and prudent lending do that.

    Even banks that are loss making contribute to increasing the money supply through fractional reserve banking.

  • 13 Jeff June 16, 2016, 9:19 pm

    I would want to know if these P2P companies go after delinquent borrowers in court to recover the money.
    Without some kind of discipline, the whole thing might blow up in economic downturn.

  • 14 grey gym sock June 16, 2016, 9:44 pm

    Fremantle / David: banks have, for every £1 they lend, £1 of either deposits or some other source of funding. so their profit margins are based on 1:1, with no multiplier. (and other sources are often more expensive than deposits.)

    there is a difference in terms of causality between banks and P2P. a P2P lender is an intermediary: it needs to attract £1 from savers for every £1 it lends out. but when a bank makes a loan, that act creates a corresponding deposit.

    bank loans are not limited by banks’ ability to attract deposits (the “loanable funds” theory – untrue for banks, true for P2P), but by how many credit-worthy potential borrowers they can find, and by regulatory constraints, etc. there isn’t any “money multiplier” either – i.e. that is not a constraint on their lending – as the bank of england now agrees: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf

    i don’t know if P2P can be more efficient. but i guess the theory is that it could be because it does everything online, with no need for a branch network, with as much automation as possible.

  • 15 FI Warrior June 16, 2016, 9:54 pm

    I tried an experiment with a modest amount of funds on one of these smaller, niche P2P platforms promising wild returns. 12% is nothing compared to what they claimed, this was easily up to 20% depending on who else was biding at the same time.

    I don’t want to name names and single out an individual platform, because I actually believe they’re really trying to do a good thing, it’s certainly not a scam. (their customer service was the best I’ve yet encountered in the several P2P outfits I’ve tested so far) This particular one lent to businesses and the directors were supposedly on the hook with guarantees as serious as their own home being pledged as collateral.

    But given enough time, as the loan book matured, you just need one or two companies (in your portfolio concocted to spread risk as there’s no protection fund) to go bust and it wipes out the spectacular claimed gains. The directors then simply file for bankruptcy, as well as their guarantors if they had any. The recovery process is long and drawn out with inevitable haircuts, so ultimately all those reassurances mean little.

    Now this is unfortunate for the majority of companies which are good businesses, who then become tarred with the same brush in the minds of the amateur investors. However it’s important to stress that I still came out with 9 to 10% net interest at the end of the experiment, which is undeniably impressive, so my point is only that the initial rate offered should just be regarded as a gross amount.

    All in all then, I am going to look at P2P as a very different investment category with it’s own pros and cons/risk profile and commit up to 5%.

  • 16 Fremantle June 17, 2016, 9:30 am

    @grey gym sock

    Thanks for the article, but it does seem like stating the same thing. Banks must hold reserves to meet their liabilities and new loans create the requirement for the banking system overall to increase reserves to match the new liabilities created by loans being deposited into bank accounts.

    The central bank interest rate sets the price of holding reserves and the price of borrowing money. Reserve ratios may not be the determiner of profitability, but they certainly are risk mitigation, and therefore a represent a functional limit on bank lending if they are unable to attract new deposits. How the equilibrium between lending and reserves is met doesn’t alter the fact that increased reserves are needed to match new deposits created by lending, as the article clearly states:

    “A looser stance of monetary policy is likely to increase the stock of broad money by reducing loan rates and increasing the volume of loans. And a larger stock of broad money, accompanied by an increased level of spending in the economy, may cause banks and customers to demand more reserves and currency”

    I don’t think students should stop learning about fractional reserve banking just yet, but maybe should also add in monetary policy and risk.

  • 17 grey gym sock June 17, 2016, 12:37 pm

    Fremantle: well, i think what makes the “fractional reserve” concept is a little misleading is that there is no fixed multiplier from reserves to bank lending. for instance, QE has massively increased reserves, but without a corresponding increase in bank lending, because it’s constrained by other factors. the paper describes a possible mechanism for how QE could increase spending/lending, viz. by putting more cash in the hands of non-banks (in place of gilts), which might (at least in theory) encourage them to spend/borrow more. if there is such an effect, it’s certainly very small, i.e. lending has not grown anything like in proportion to reserves.

    “attracting deposits” is not an issue for the bank system as a whole, in the sense that making loans creates the deposits. it can be an issue for individual banks, in that they need to attract sufficient deposits, or other funding, for the loans they are making. i look at that as a way of saying that the loans need to be profitable: what they charge for loans, less expected losses from defaults, needs to exceed their cost of capital (e.g. what they pay on deposits). so this is about finding people/businesses who want to borrow, and represent a decent credit risk, and will pay a high enough interest rate for it to be profitable.

    the banking system doesn’t start with a quantity of deposits, and have the ability to lend some multiple of that figure. it can lend however much there is a sound business case to lend. this does assume that the central bank will assist banks in the normal ways – e.g. providing additional reserves when an individual bank (which they judge to be otherwise sound) is short of them.

    i’m not sure if this is a real disagreement, or just a matter of emphasis, or going into more detail …

  • 18 The Investor June 17, 2016, 1:09 pm

    Excellent discussion! 🙂

    *plunges hand back into popcorn*

  • 19 David June 17, 2016, 2:16 pm

    Can’t wait for the Monevator article on fractional reserve banking!

  • 20 The Rhino June 17, 2016, 4:48 pm

    have you done the obligatory brexit article yet, or are you holding on til the last minute?

  • 21 Mathmo June 17, 2016, 5:26 pm

    I’m a huge fan of Zopa. I’m an even huger fan of popcorn, pass the bag, TI.

  • 22 Fremantle June 17, 2016, 5:27 pm

    No fundamental disagreement, because the BoE article doesn’t refute that lending creates a need for banks to hold more reserves due to the requirement to cover the potential for withdrawals created by the new deposits.

    Good discussion and much needed relief from Brexit and yesterday’s event in Yorkshire, thanks.

  • 23 Topman June 17, 2016, 5:55 pm

    Pretty please no “brexit article” TI. As it is, I mute the TV when a protagonist from either camp swims into view. Personally, I’ve known all along which alternative I favour, and that’s where my “thrupence” will go on Thursday

  • 24 The Investor June 17, 2016, 7:14 pm

    @Topman — If I thought there was something definitive and constructive to add from a financial/investing perspective — or even just something unsaid — I might have written an article, but I don’t think there is, really. That’s not because I don’t think the vote is not important or that it won’t have a market/financial consequence, but because I do think it’s uncertain in the extreme, and taking action is fraught with risk.

    (I’ve been churning about my active portfolio of course but that’s my problem! 😉 )

  • 25 jed June 18, 2016, 10:21 am

    @Topman @The Investor,
    Agree 100% I cant take any more of it.

  • 26 Jeremy August 13, 2016, 9:18 am

    To me it seems more appealing to use a p2p lender who is lending to businesses, that therefore would help grow the economy, rather then a p2p who lends to consumers who want to blow it on a holiday to Ibiza?? Surely it’s more beneficial to the economy to lend to a business than to lend to someone who wants to redo their kitchen? What do others think?

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