Peer-to-peer (P2P) lending is the growth industry in modern finance. It more than doubled in both the US and the UK last year, has become a multi-billion dollar industry in China, and is now taking root in Europe.
What surprises people is that, in the UK especially, its startling growth has been driven by normal savers, not big institutions. It has been a quiet online revolution led by savvy DIY investors.
This sits well within the wider debate concerning 'inclusive' capitalism prompted by economist Thomas Piketty.
The concept of P2P instinctively appeals: people dealing with each other for mutual benefit. Much is written about the modern "sharing economy" – think eBay and Airbnb – and P2P lending is the finance equivalent.
But as more savers turn to the industry in the UK, so it has caught the eye of the large institutions. This month, P2P Global Investments, a London Stock Exchange-listed investment trust, raised £200m (€247m, $335m) from institutional investors to lend through the major platforms.
How will this mix of retail and institutional play out?
The institutional illusion
Some view institutional money with suspicion. It sounds far removed from the open model that is P2P's heritage.
But institutional money is still retail money – it is just that the saver has handed management of their money to a professional.
A key attribute of P2P is its accessibility for the normal saver – just ask the many thousands already lending. Institutional money simply broadens this access to include savers who prefer to outsource the running of their finances.
If anything, the arrival of institutions is a rallying call for savers to be more active and take control over their money. That is the best way to get value as it cuts out the middleman and their associated fees.
As for borrowers, money is money: there is no difference between institutional or retail money as far as they are concerned.
Barbarians at the gate?
There is concern that the community aspect of P2P is threatened by the arrival of the institutions.
It poses fresh challenges: huge inflows pressuring cautious platforms to compromise their impressive credit standards; powerful institutions demanding favorable terms or simply "re-intermediating the dis-intermediators", eating into the value that P2P delivers to savers and borrowers.
Savers value the social aspect of P2P. They like its transparency – the open machinery of the market versus the unfathomable opacity of banks.
An open market
Our vision is simple: create an open market and ensure everyone is treated the same.
We offer a market where people decide the fair rate for money – the key is that normal savers can express themselves on the same terms as the institutions. They can both set the rate that suits them.
We fought hard to ensure the normal saver – whatever their deposit – is able to access the market easily and isn't forced to go via an intermediary. This has been a hard-won regulatory victory – one that is re-defining the level of control people have over their money.
We built our business around the retail customer. That won't change.
Being a new challenger industry, value and service are critical differentiators for success – and so far the industry has delivered on both. The next challenge is to deliver that at scale.
This is where institutional money can help. With their due diligence processes and ability to mobilise large amounts of capital, institutions offer a step forward for P2P. The scale they bring - the liquidity - allows the platforms to make the significant investments required to maintain a mass-market product.
Furthermore, many savers will see the credibility of institutional involvement as the green light to try out P2P lending themselves.
Holding the line
Integrating institutional money successfully is now the major challenge for UK platforms – it is already standard for institutions to lend on the US platforms.
For me, the key is that open market principles are maintained – that retail and institutional customers are treated the same. We will not allow any moves that disturb the balance of our fair market.
If the platforms bow to all the demands of institutional money, it could be – I believe – the end of P2P as a value proposition.
Get the balance right, however, and the platforms have the potential to cause massive disruption to the traditional ways of lending and borrowing.
Keep a fair market and "peer-to-peer" can move seamlessly to "many-to-many."
Rhydian Lewis is the Founder and CEO at RateSetter.