Awareness of peer-to-peer (P2P) lending is increasing, but people don't fully understand how it works, and aren't aware they could lose money, or have to pay tax on their earnings, according to a survey funded by the Yorkshire Building Society.
There is some feeling in the crowdfunding industry that the survey is a piece of scaremongering. After all, banks and building societies currently offer savings products with yields at or close to historic lows. The survey focuses on awareness of security - an area where deposit-type savings accounts benefit from the Financial Services Compensation Scheme. Let's examine the survey.
Yorkshire Building Society comissioned research through YouGov in January to test the public's awareness of peer to peer lending. Out of a random sample of 1,541 UK adults, 42 per cent said YES, they had heard of this new financial service. But when tested on how much they knew about it, the poll revealed that relatively few fully understood the detail of how P2P lending actually works.
Setting aside the ones who had never heard of it, YouGov discovered that of 689 UK adults who were familiar with the term 'peer-to-peer lending':
- 44 per cent were unaware investors in peer-to-peer lending can lose money as well as gain it;
- 53 per cent were unaware peer-to-peer lending is a type of investment, rather than a savings product;
- 60 per cent were unaware peer-to-peer lending investors had no protection under the Financial Services Compensation Scheme;
- 64 per cent were unaware income tax is payable on any returns from peer-to-peer lending;
- 73 per cent were unaware platforms arranging peer-to-peer lending charge a fee or commission.
So .. should we worry?
Investor education is one of the main reasons we started AnotherCrowd.com
We think not. To put the YBS YouGov survey in context, let's compare it to another survey from last summer, published by Liberum. In that survey, 35 per cent of the public said they had heard of P2P lending. A jump from 35 per cent to 42 per cent means a twenty percent growth in awareness in six months. A fashionable trend is catching on.
The Liberum survey also asked how many people had actually put money into peer-to-peer lending. The figure was just two percent. So for every person who had invested money in peer-to-peer lending product, there were sixteen people who knew about it, but hadn't invested.
We have covered the comparison between deposit/savings accounts and crowdfunded alternative finance products several times on this site. Looking at the relatuve merits of access, security and yield is a major theme of last summer's piece, The Battle For Hearts. Minds And Piggy Banks, for example. There are several more on site. Just search for "yield" or "security" to find them.
Investor education matters to us. It's one of the main reasons we started AnotherCrowd.com. P2P products are new asset classes; they are not magic beans, nor are they savings accounts heroically set free from greedy and corrupt institutions. You need to understand the costs, the risks and the tax liabilities before you invest.
The journey from knowing a new kind of product exists to deciding to buy is a long one
We take seriously the FCA's warning that firms must describe their products accurately, and must not "cherry-pick" the evidence to make them sound better than they are. If we thought the people who answered YES to the five questions in the YBS / YouGov survey had read the marketing literature of even one P2P lender, we'd be very concerned. But that is not what the survey was set up to examine.
It's still early days for P2P lending. The industry's trade body, the Peer-to-Peer Finance Association (P2PFA) reports that 114,000 investors have lent £2.1 bilion. The equivalent figures for ISAs are 13.5 million accounts, and £470 billion of funds. The typical British adult is 117 times more likely to know someone who has put money into an ISA than someone who has put money into peer-to-peer. "Awarenes" is just that: a blurry thing on the horizon, getting closer, with no definite shape. We'd like to see a follow-up to that survey, and more work in the same vein.
Savings and investments are not an impulse purchase. The journey from knowing that a new kind of product exists to deciding to buy it is a long one. In context, we are not too surprised that there are large numbers of people who are aware of the P2P lending phenomenon but haven't fully grasped how the products work. And we will do everything we can to change that.