P2P or I2P? Why it’s time for a new name.

As monikers go, peer-to-peer or P2P has a certain ambiguity. For some it starts and stops with retail investors, for others it suggests a mix of retail and institutional. In reality, P2P funding derived exclusively from retail investors is increasingly rare. The question is whether businesses in need of funding really care where their working capital assistance comes from.

In theory, P2P lending presents a compelling solution. Overheads are low, processes are swift and lending rates are attractive, so borrowers get a fast loan. Everybody benefits; both the lenders and borrowers are winners in a deal that aims to democratise finance.

However, it’s important that treasury departments have a clear understanding of where P2P investment comes from, as it is no longer the sole preserve of the man in the street. Instead it is increasingly a route into the lending market for institutional investors.

All things being equal

The truth is that many P2P platforms are not just willing, but compelled to partner with institutional funders. This is not seen as a failure to uphold the ethos of P2P lending; more a milestone in a lender’s growth and development.

Examples include Zopa, the world’s first P2P service which partnered with the UK’s challenger Metro Bank in what was described as a sign of maturation; Funding Circle that accepts cash injections from the UK government’s British Business Bank and Funding Knight which would have collapsed last July without the aid of institutional investment firm GLI Finance.

An industry norm

The practice of P2P lenders partnering with institutions is fast becoming an industry-wide norm. They act more like traditional asset managers and charge a fee in exchange for the allocation of capital. This is not a criticism; it is however, a far more accurate description of how P2P lending is currently practiced.

The P2P industry as a whole, however, seems to have tacitly agreed to maintain the outdated definition of how it works – while unabashedly welcoming interested institutional investors into their boardrooms at the same time. Perception is key, and in a millennial world that prefers to eschew ‘big money’ and corporate bureaucracy, a community driven crowd-funding image is perhaps better for new business.

Spade or shovel?

The problem is that it’s not just about market image. There is little equality between retail and institutional investors and no comprehensive parameters have been set for what P2P is – or isn’t. The only directive is vague at best, requiring that P2P firms ‘secure some lender funds from retail consumers where possible’. In other words, it is not impossible for a ‘P2P’ firm to secure one percent through a retail investor and 99% from larger institutes.

It’s time for the industry to acknowledge that the current definition, or name, needs some adjustment. One approach is to set clear boundaries that outline the true extent of the P2P terrain. Alternatively, let’s get rid of the current term and simply call it ‘alternative finance’. If that’s not distinct enough, then perhaps the best solution is to rename it as I2P (institution-to-peer) lending.

The term ‘P2P’ may have run its course and needs to be either redefined, or accepted as a non-binding term. At the end of the day, the appeal is not inherently linked to whether the funds come from individuals or institutions, but that the money is available. Businesses that need to access funds urgently are looking for a fast, transparent solution that meets their needs – they don’t care if the money comes from a retail or institutional investor.

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Mark Carney Bank of England

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