Metro, which set up as a high street challenger bank a decade ago, is in talks to buy RateSetter © Charlie Bibby/FT

Just a few weeks ago, the head of peer-to-peer lender RateSetter criticised banks for paying savers a pittance for the deposits that fund their loans, while generating large profits.

“I personally care about normal people getting better returns,” said chief executive Rhydian Lewis.

But now Mr Lewis is discussing selling the company he founded to one such bank.

Metro, which set up as a high street challenger a decade ago but has struggled to take a substantial share of the lending market, is in talks to buy RateSetter. The takeover would help the bank build a stronger consumer lending business, which it would fund with the deposits in its interest-free current accounts.

Ratesetter’s about-face is the most recent example of a broader trend taking place across the peer-to-peer lending sector in response to the coronavirus crisis.

Peer-to-peer lenders set up to match borrowers with retail investors, who earn interest by funding loans. They grew rapidly after the last financial crisis, promising to provide a better deal to both borrowers and income-starved savers than they would receive from the big banks.

But faced with rising default rates, falling demand for new loans, and nervous retail investors, lenders are increasingly being forced to abandon their original ambition of democratising finance and turn instead to backing from big financial institutions.

“When it’s institutional investors lending to individuals, it’s a different kind of peer-to-peer,” said Charlie Taylor, head of property lender Octopus Choice. “I’m not sure it’s what people had in mind.”

Substantial outflows in the first few weeks of the crisis highlighted long-held fears that relying on retail investors could cause liquidity problems for these lenders. Around 15 per cent of RateSetter’s customers attempted to withdraw funds from its platform in just a few days in mid-March, causing a long backlog in payouts. Octopus Choice suspended trading on its fund in late March, as withdrawals quickly outpaced inflows.

So far, most big lenders have not been hit by a sharp increase in defaults, as many consumers and businesses have received assistance through government programmes or temporary payment holidays. No investors in RateSetter have lost any money, despite an increase in borrowers asking for “breathing room” on repayments.

Several executives said they were confident that most large firms would survive the crisis in some form. While retail money tends to be volatile in a crisis, “institutional money can be more stable”, Mr Taylor said.

Many larger peer-to-peer companies, such as Funding Circle, had already started originating loans for pension funds, hedge funds and other institutions before the crisis hit. But the pandemic has accelerated the trend towards institutional backing and pulled in even the most idealistic lenders, such as RateSetter.

Lenders including ThinCats, Assetz Capital and listed peer-to-peer group, Funding Circle, have joined government support schemes that have provided a lifeline for tens of thousands of small businesses.

Government guarantees on the Coronavirus Business Interruption Loan Scheme and bounceback loan scheme allow companies to lend at lower interest rates than peer-to-peer lenders could normally afford. “If you’re not on these schemes, it’s going to be difficult to do any lending over the coming period,” said one industry executive.

But loans issued through these schemes must be funded by institutional backers, pushing peer-to-peer lenders farther away from their retail roots. ThinCats has permanently stopped serving retail investors, while Funding Circle has temporarily stopped.

“This is definitely the direction of travel,” said Stuart Law, Assetz’ chief executive. “We expect to see more and more institutional capital in the sector.”

Experts said peer-to-peer might soon be simply “institution to peer”. One executive cautioned that the business loans available for retail investor backing could be lower quality, many having failed to meet bank lending criteria.

Metro Bank’s interest in RateSetter highlights the partial success peer-to-peer lenders have had in building efficient platforms for originating loans. RateSetter has originated around £3.9bn in loans since its foundation in 2009.

Metro, which suffered a tumultuous year last year, after the discovery of a big reporting error led to the departure of its chairman and chief executive, is under pressure to set out a new strategy for growth. The bank first ventured into peer-to-peer lending in 2015 when it struck a deal with Zopa to channel customer deposits into loans through its platform.

However Metro cautioned that its takeover talks were still at an early stage, and may not lead to a deal. RateSetter declined to comment this week.

Speaking last month, Mr Lewis noted that the challenges facing the peer-to-peer sector meant “everyone may be more comfortable if lending is done by institutions”.

But, he added, “institutions get their money from normal people. Those people should be able to access the value from finance.”

He may now have to face up to his own company joining the ranks of lenders leaving behind their pure peer-to-peer origins.

This article has been updated to reflect the fact that Assetz still accepts retail investment.


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