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Do new models suffer for their transparency?

I was fascinated to see the press release today from uSwitch which stated that 84% of consumers do not want to invest their money with a peer-to-peer lender – not because of the 39% who are worried about the lack of FCA regulation or the 49% who say it’s because they don’t know enough about them; nor even the 9% who don’t want to use an online platform. What fascinated me was the 25% who don’t want to lend money if they don’t know where it’s going.

I wonder what these people think happens to their money when they stick it in a bank, except that it gets lent out to someone else – probably multiple times, rather than just the once. I think that leverage was 25x for some banks just ahead of the 2008 crisis, wasn’t it?

Yes, yes… I realise that there is a Financial Services Compensation Scheme which bails people out if their bank goes under and they lose money. But my point is that people didn’t answer the question with, “I would be concerned about the fact that it doesn’t fall under the FSCS” (which would anyway allow companies like RateSetter (of which I am a director) to demonstrate how they deal with that risk through their provision fund, and boast how no default has cost any lender  so much as a penny of interest or capital since it launched). Rather, they answered it with, “I don’t want to lend my money out if I don’t know where it is going”.

Yesterday, an organisation called Move Your Money issued a press release calling on people to move their money (clever name, eh? Proper does-what-it-says-on-the-tin stuff) out of banks which “fund climate change”. Inadvertently, it made the point that people haven’t the first clue what happens to their money when they stick it in the bank. Equally, inadvertently, it made the point that on the whole, no-one gives a monkey’s, either.

I’m currently exploring how regulation, which in turn can be influenced by public perception, impacts business models which actually bring transparency to a process that always existed, but in a more opaque form. No prizes for guessing which company is my starting point. But I found today’s example of it pretty interesting.

If you have any thoughts on the subject, please either post them in the comments below or drop me an e-mail.

 

 

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  1. mark.davies@camberton.com says

    For interest, here is the uSwitch press release:

    – Over eight in ten (84%) of consumers would not invest their money with a peer-to-peer lender[1]
    – Four in ten (39%) are worried about the lack of FCA regulation and half (49%) say it’s because they don’t know enough about them[2]
    – A quarter (25%) don’t want to lend money if they don’t know where it’s going and one in ten (9%) are reluctant to use an online platform[2]
    – With only one in four (25%) expecting to earn only £50 or less this year in interest on their cash ISA savings, consumers are looking elsewhere to stash their savings[3]
    – 43% are using current accounts, while one in ten (10%) are putting their money in a piggy bank or rainy day jar at home[4].

    With interest rates on savings accounts remaining at a historic low, peer-to-peer lending has been hailed as another way to boost investments. However, savers clearly still need some convincing – the majority (84%) would not consider investing their money with a peer-to-peer lender, according to new research from uSwitch.com, the independent price comparison and switching service[1].

    Although official figures show the UK’s peer-to-peer lending sector increased by 121% during 2013[5], only 2% of savers are currently using a peer-to-peer lending platform[4]. Six in ten consumers (59%) are reluctant to use a peer-to-peer lender because the industry is not covered by the Financial Services Compensation Scheme, while four in ten (39%) say that it is because it is not regulated by the FCA[2]. A further half (49%) are sceptical about using peer-to-peer lenders simply because they don’t know enough about them, and another fifth (22%) are weary about using a firm they haven’t heard of[2].

    Some may argue that the introduction of regulation on the peer-to-peer lending market from April[6] will boost consumers’ interest in the platforms, but barriers still exist. A quarter (25%) don’t want to lend money if they don’t know where it’s going, and one in ten (9%) don’t want to use an online platform[2].

    Meanwhile, poor cash ISA rates have clearly taken their toll on consumers’ savings with one in four (25%) expecting to earn no more than £50 in interest on their savings[3]. As a result, consumers are looking elsewhere to stash their savings with over four in ten (43%) using their current account[4]. Worryingly, a further one in ten (10%) think keeping their money in a piggy bank at home is the best option[4] when in fact this means their money is being eroded by inflation. Almost six in ten (57%) have opted for an instant access savings account, while a third (34%) have gone for fixed term savings accounts of between 1 and 5 years[4].

    Jafar Hassan, personal finance expert at uSwitch.com, says:

    “While the take up of peer-to-peer lending has been low so far, regulation should provide additional peace of mind. But to encourage more widespread adoption, peer-to-peer lenders need to convince consumers that their money is safe, and they can’t simply rely on regulation to do this. The fact is that many consumers are still skeptical about lending money if they don’t know where it’s going; others simply don’t want to use an online platform.

    “People fed up with poor ISA rates but nervous about peer-to-peer lending should consider keeping their money in a high interest current account. Nationwide’s Flex account offers rates of up to 5% while Santander offers up to 3%.

    “But this doesn’t mean consumers shouldn’t write cash ISAs off – with normal savings products and current accounts, basic rate taxpayers hand over 20% of the interest to the taxman. And rates may still improve – last year, we saw a flurry of fixed-rate cash ISAs hit the market in the run up to the new tax year from providers such as NatWest[7], so everything is still to play for.”

    Notes:

    Research carried out online with the uSwitch.com Consumer Opinion Panel in January 2014 amongst a sample of 1,613 GB adults

    1. When asked ‘Peer-to-peer savings firms like Zopa, Funding Circle and Ratesetter can let you earn up to 6% on your cash, but are not regulated and come with no safety guarantee. With this in mind, would you consider investing your money with a peer-to-peer lender?’ 84% said ‘No’ and 16% said ‘Yes’.
    2. When asked ‘You said that you would not consider using a peer-to-peer firm for your savings. Why is this? (Tick all that apply)’ 59% said ‘Peer-to-peer is not covered by the Financial Services Compensation Scheme (meaning you could lose your money)’, 49% said ‘I don’t know enough about them’, 39% said ‘Peer-to-peer is not regulated by the FCA’, 25% said ‘I don’t want to lend money if I don’t know where it’s going’, 22% said ‘I don’t want to use a firm that I haven’t heard of’, and 9% said ‘I don’t want to use an online firm’.
    3. When asked ‘How much do you expect to earn in interest on your current ISA savings?’ 12% said ‘Less than £10’, 13% said ‘£11-50’.
    4. When asked ‘Which of the following do you currently use for your savings? Please tick all that apply’ 43% said ‘current account’, 57% said ‘Instant access savings account’, 115 said ‘Fixed term savings account – 1 year’, 8% said ‘Fixed term savings account – 2 years’, 45 said ‘Fixed term savings account – 3 years’, 1% said ‘Fixed term savings account – 4 years’, 5% said ‘Fixed term savings account – 5 years’, 10% said ‘a piggy bank / rainy day jar’, and 2% said ‘Peer-to-peer lending (e.g. Zopa, Ratesetter, etc.)’
    5. Source: Peer to Peer Finance Association (P2PFA)
    6. The FCA takes over regulation of consumer credit from the Office of Fair Trading (OFT) in April 2014.
    7. Source: This is Money

    And here is yesterday’s from Move Your Money:

    Move your Money, the movement for better banking, is encouraging people to move their money out of banks that fund climate change.

    For Climate Week, supported by over 180 other organisations, the campaign is highlighting the role of Britain’s top five banks in the fossil fuel industry, with the exploitation and burning of of oil, gas and coal a direct cause of rising CO2 emissions. Some of the biggest investors in climate change, UK banks have channelled £12 billion into coal since 20051 and underwritten over £170 billion in bonds and share issues for fossil fuel companies in just two years.

    Charlotte Webster, Campaign Director, Move your Money said:

    “We live in a time where the chances are you believe that climate change is destructive and, importantly, very real. At the same time, it’s more than likely your cash is being used to fund it. This is totally irrational, much like the behaviour of the big banks. We’re saying it doesn’t have to be this way. You can put your money where your mouth is and not invest in climate destruction.”

    She added:

    “The fossil fuel industry’s business model is based on destroying the planet. The good news is their returns will start to fall, but in the meantime your money doesn’t have to be involved. It can be doing good and seeing healthy returns. So, check out who’s performing best on the environment and ethics in our scorecard and Move your money now. It’s really simple to do.”

    The Move your Money switching scorecard ranks over 70 British and global banking providers on five key categories – honesty, customer service, culture, supporting the economy and ethics.

    The ethical score is made up of performance across environment; animals; people; politics and product sustainability. Environmental performance is measured by investments in environmental reporting; nuclear power; climate change; pollution & toxics; habitats and resources.

    The Move your Money switching scorecard is available on their website with more detail on the results on Ethical Consumer.

    Notes:
    1. WDM Carbon Capital campaign – The impact of the UK finance industry on Climate Change
    2. Carbon Tracker – Embedded carbon in equity markets
    3. Fossil Free – A global movement to divest from fossil fuels
    4. Blog: ‘How I moved my money from funding climate change to renewable energy.’

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