Why the legacy of the public-private finance franchise model makes it near impossible for more traditional “loanable funds” finance models to compete, irrespective of the technology they think they have in hand.
Ratesetter has changed its model to deal with fragility in its fund designed to protect investors from losses. In the process, it has revealed just how bank like some “peer-to-peer” lenders have become.
Here’s a snippet from the latest annual accounts of Ratesetter, one of the UK’s top three “peer-to-peer” lenders, and shows the startup taking £2m of risk on to its own balance sheet in order to fund a borrower in “financial difficulty”.
Imagine you lent a friend £2000 for three years at a 25 per cent yearly interest rate. That would be a nice little earner for you and, sure, it’s not a cheap loan as far your friend is concerned. But he’s not that good of a friend anyway and rent-seeking is easier than working. The first nine months pass and your friend pays up every month, right on time. But then he misses a payment. When you call his mobile, you get his answering machine and when you ask around, people shuffle their feet and mumble stuff like “I dunno maybe he’s like at the gym or something”.