The Channel Four programme, following businessman Dave Fishwick and his brave banking plans, shines the spotlight on problems customers and small businesses face when it comes to dealing with banks.
High street banks have had their reputations tarnished in recent years, with the reluctance to lend, tales of poor customers service and scandals, such as mis-sold Payment Protection Insurance (PPI) and rigging LIBOR rates, all denting confidence.
Bank of Dave: Dave Fishwick has captured the imagination of the country with his Channel Four programme
His simple plan is to pay a savings rate of 5 per cent, and lend money to businesses and people who need it and who he has assessed will pay him back.
That proved to be a raging success, yet the Financial Services Authority at first refused to meet him and then tried to shut him down.
Dave has been inundated with requests from people asking him to open up a branch of his ‘bank’ in other parts of the country, only to be left disappointed. He is just one man after all.
But there is an alternative – lend-to-save, otherwise known as peer-to-peer (P2P) lending. It has become a popular concept in the last couple of years.
It works by matching investors, who are looking for a more competitive rate of return on their money, with those lending to those who want to borrow, usually at far lower APR rates than high street providers – and this is exactly the model 'Bank of Dave' uses.
Those who do borrow money have to meet strict criteria. This means default rates tend to remain extremely low compared to other loan providers.
But the fact remains that in return for lend-to-save's higher rewards you are taking on a risk that is not involved in a savings account.
The three major players in the industry, FundingCircle, RateSetter and Zopa, have been attracting swathes of investors through decent rates offered online.
FundingCircle is advertising an 8.8 per cent rate and RateSetter 7.4 per cent, before defaults and fees, while Zopa is offering 5.5 per cent after fees.
Dave’s blueprint has already been a hit online in the form of these lend-to-save firms, according to the boss of RateSetter, who speaks exclusively to This is Money…
‘Bank of You isn’t as far away as you might think’
Rhydian Lewis: RateSetter boss says Bank of Dave concept is in action online
Just before you up sticks and move to Lancashire, you might be surprised to know that Dave’s blueprint for a bank already exists elsewhere, and has done for some time: online and available to all, in the form of P2P platforms.
For, after all his struggles against Financial Services Authority red tape, that is exactly what Dave has created; a P2P company with a shop front, taking deposits from Burnley Savers and lending it directly to people or small businesses.
The same process applies online, with RateSetter matching smarter savers with credit-worthy individuals, ensuring everyone gets what has been agreed.
Ask any of the 250,000 who are currently using P2P lending in this country why they do so and the chances are you will get a response similar to those that Dave makes throughout the show.
They are the same reasons why we set RateSetter up in 2010. Historic low interest rates by the Bank of England, and banks reluctance to lend or offer fast and flexible low cost loans, mean borrowers and savers are looking elsewhere.
Savers in particular are crying out for fair rates and a return to banking in its purest form – without being penalised for the mistakes of other parts of the business or wider economy, and without subsidising the overheads that accompany running a branch in every town and city. And lending to save is an attractive proposition to achieve five per cent or better, with the risks carefully managed by the operator.
There are differences of course: the Bank of Dave is reliant on Dave’s largesse, as well as his personal approach to assessing creditworthiness.
RateSetter undertakes credit checks in the same way as a bank, using credit reference data, and only approves a relatively small percentage of applicants.
The local nature of the Bank of Dave is a great strength, and creates valuable local reinvestment and support; online peer-to-peer lending can match a borrower in Bournemouth with a lender in Leeds.
But the fundamentals remain the same: bringing people together to give them a better and fairer deal. Even Dave’s Guarantee – that he will personally cover any losses incurred by savers – is similar to RateSetter’s compensation fund that reimburses Lenders and has ensured that everyone has received every penny of capital and interest they have expected.
Dave’s battle with regulation throughout the series echoes that of online peer-to-peer companies – albeit for different reasons. While Dave struggles against the mountain of red-tape, RateSetter and other members of the P2P Finance Association have actively proposed more regulation.
Why? We think it is important that all P2P companies which offer financial products to consumers and small businesses are run in a way that ensures maximum safety for consumers.
The announcement by Treasury that P2P will indeed be regulated from 2014 is a victory for consumers, not regulators: a regulated P2P industry will bring even more security and transparency for consumers, and ensure that operators are sensible and credible businesses.
In 2013 RateSetter has already matched well over £10million between borrowers and lenders, yet continues to provide that efficient service you might feel is missing from your banking provider.
The Bank of You isn’t as far away as you might think.
Lend-to-save: RateSetter has seen growth of 10% each month in loan volume in the last 12 months
You will not get savings deposit protection but RateSetter does have a provision fund
At present, lend-to-save firms are not covered by the Financial Services Compensation Scheme (FSCS). This protects savers to the tune of £85,000 per institution if it goes bust.They also do not benefit from the £50,000 FSCS investing protection. This covers loss arising from bad investment advice, poor investment management or misrepresentation, or alternatively when an authorised investment firm goes out of business and cannot return investments or money.
The way to think of lend-to-save is that it is an investment that offers savings-style rates. There is no guarantee you will get your money back, but the three big players involved we highlight here have put a lot of work into making sure borrowers do not default, make public their records and have many happy customers.
The three major lend-to-save firms set up the P2P Finance Association last year, which has a strict code of practice, including minimum capital requirements and other systems and controls.
None of the smaller lend-to-save firms have joined due to the stringent criteria.
The Association announced in December that the industry will be regulated by new financial body the Financial Conduct Authority (FCA) – but it remains to be seen whether this will include any protection on investors’ money.
However, RateSetter does have the added bonus of a ‘provision fund’ which the other two lend-to-save firms don’t have in place. Every borrower pays into this pot and if they miss a payment, the fund is called on to cover the lender.
The fund – currently sitting close to £1million – has met every claim that has been asked of it, RateSetter says.
It also takes a cautious approach to who can borrow, declining 85 per cent of all applications. For this reason, it says, it has the lowest default rates in the P2P sector.
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