Funding Circle Edges Closer to the Dark Side

By The Secret Investor

My biggest fear with P2P lending has been that, once the 2008 financial crisis became a distant memory, the large institutions will regain an appetite for risk and use their sheer size to squeeze out the Alternative Finance market. But something even worse is beginning to take shape as one of our own moves closer to the "dark side".

Funding Circle has decided that it wants to win more business from the banks and as the old saying goes "If you can't beat them, join them". As a result, investors on that site feel their relationship with the platform is becoming less like lending partners and closer to retail banking customers who just provide funds. FC have tried hard to convince them that their ongoing evolution is only going to be a good thing but had to admit this week almost a third of depositors are about to see lower returns when auctions are scrapped and replaced by pre-set interest rates at the end of this month.

Becoming more bank-like was never going to benefit investors…

This drift away from being saver-friendly began last year when the platform reduced the amount of information provided on loan requests and nowadays FC show little concern when borrowers don't have the courtesy to answer questions from people who are about to provide them with finance worth up to half a million pounds in total.

The latest, and biggest, phase of the erosion of investor satisfaction sees the platform moving away from allowing borrowers and lenders to set rates between themselves to a model where FC become the all controlling bank they were originally set out to be an alternative to.

Funding Circle foresee all loans quickly becoming fully funded at rates they have pre-agreed with borrowers but even those fixed rate loans for property developments that are currently listed on the site regularly need cashback offers to reach the required total. As FC are setting the new from 28th September rates at the historical averages for each of their 6 risk bands, it is likely many future loans that would have previously generated above average returns for lenders will require some form of incentive to reach their target unless the big institutions are attracted to step into the breech – the latter would be a further nail in the coffin of Alternative Finance.

Pre-set rates will also affect the dynamics of the secondary market, particularly when FC decide to increase them, making existing holdings less saleable. They have made system changes to allow loan parts to be sold at an increased discount – in effect admitting investors can expect to face losses if they require access to their funds.

So it is pretty much bad news all round for their current lenders although fixed rates may attract passive investors when the Alternative Finance ISAs take effect next Spring. They'll just want to deposit capital into an account and let the Auto Bid process manage it. Perhaps, unfortunately for the likes of myself who enjoys seeking out a good deal, the opening up of this financial genre via ISAs was always going to result in a dumbing down of available products.

For active investors, there is something of a dilemma. Due to its size, Funding Circle offers so many loans it is easy to spread capital around very thinly. Will they endure the pain or does the extra hassle of managing investments on many platforms become worthwhile?

Personally, due to the convenience of so many loans to choose from in one place (and the security from being with the largest provider) I have ended up with 57% of my P2P holdings in Funding Circle and had already decided it was time to diversify onto other platforms. Therefore, even before the latest announcement, I had no plans to make further deposits into my FC account but will continue to re-invest selectively into higher risk band loans and would only make withdrawals should these dry up.