- Ratesettler, the peer to peer lending platform, to continue to operate as a distinct label under the Metro Bank group
- Its loans will be funded by the Metro Bank’s balance sheet, going forward
- By entering an emerging space, the move is expected to diversify the bank’s portfolio and enhance its returns
The banking industry has been under the pump since the onslaught of the novel coronavirus across the world. During the unprecedented crisis, the banking sector across United Kingdom saw emergence of a parallel industry, Peer-to-Peer (P2P) lenders, which offer unsecured loans to under or thinly banked people.
In a bid to enhance its unsecured lending capability, Metro Bank Plc (LON: MTRO) recently announced acquisition of P2P lender, RateSetter (Retail Money Market LTD) for a deal which could be valued between £25-£50 million.
Founded in 2010, UK's most popular peer-to-peer lender, RateSetter had a customer base of more than 0.75 million comprising of both investors and borrowers, as on 31 March 2019. The P2P lender has disbursed loans worth £4 billion since inception. The company specialises in mortgages, vehicle finance, and unsecured loans.
Metro Bank is trying to get some ground in the emerging space of unsecured lending. Acquisition of RateSetter is a strategic move to diversify its portfolio of assets and enhance returns. Metro Bank group would like to leverage upon the underwriting capability of the P2P lender and build growth on an existing, scalable platform. The bank expects to improve its lending yield in the unsecured loans vertical by leveraging upon the acquisition of RateSetter. Metro Bank would offer loan products under both the RateSetter and Metro Bank brands and shall operate RateSetter as an independent platform.
The banking sector is likely to see similar consolidations in the times to come. Few months ago, another P2P lender, Zopa Group was offered a full banking license by the FCA. The Fintech Group would offer banking services as a separate vertical under the name Zopa Bank, in contrast to its existing P2P lending services. The offerings of the new bank would be backed by FSCS (Financial Services Compensation Scheme), which is a statutory deposit insurance and investors compensation scheme.
P2P lending has its own advantages. In most of the cases, P2P provides higher returns to lenders in comparison to other debt instruments. P2P lending has a deeper penetration in comparison to conventional purpose driven loans offered by the banks. It is easy for the borrowers with lesser credit score or financially excluded people to avail loans under the P2P framework. Zopa Group aims to cater to this segment of the population.
However, P2P investments are subjected to much higher credit risk in comparison to conventional debt instruments. Since there is no financial intermediary in between, the lender should be aware of the default probability of the borrower.
Due to the economic impact of the outbreak of Covid-19, the borrowings have certainly declined amid lockdown. Due to unprecedented economic crisis and uncertainties caused by the pandemic, the demand for credit has plummeted substantially. In addition, banks are finding it difficult to complete their documentation and underwriting with respect to loan disbursement in these turbulent times.
In April, the UK households have paid off £7.4 billion in their non-mortgage loans and credit card bills, according to Bank of England. This is an unusual event and was non-existent in the pre-Covid era. This indicates that the consumers are taking a prudent approach while spending and saving more as they tend to get wary of the uncertainties posed by the outbreak of the novel coronavirus.
Adding to the woes of the banking sector, the Britain’s regulator for financial markets, the Financial Conduct Authority (FCA) announced moratorium on consumer credit products such as credit cards, personal loans, and overdrafts. The consumers are required to make minimum payments for their credit card bills and might even request to lender for a deferral. In addition, the lender is not supposed to charge any fee for deferral. The FCA has issued similar guidelines for personal loans. The FCA had earlier asked the lenders to wave interest charges on an overdraft facility of £500 with certain conditions.
Banks are the engines of the economy as they regulate and control the flow of credit in an economy. As the coronavirus pandemic washed up the shores of the United Kingdom, most of the economic activities came to a screeching halt altogether. The British government-imposed lockdown to curtail the spread of the deadly pandemic and asked people to stay indoors.
Banking is the backbone of the economy and has a major contribution towards its growth. The banks play a key role in driving the currency and financial stability in a country. The bank’s primary revenue comes from the interest payment made by the borrowers. The banks generate secondary revenue from fee based ancillary services. Banks are as important as credit for an economy. The central bank has already slashed the interest rates; they are at an all-time low. Usually, this should result in increased credit levels, but that is not happening.
With consumer credit decreasing, lesser interest rates, and the moratorium imposed by the FCA, the bank’s revenue streams would be under immense pressure. Also, there has been a significant decline in cross-selling of its ancillary products & services of the banks during lockdown which would be a double whammy for the banks.
Moreover, the stimulus packages announced by the British government such as Bounce Back Loans and other schemes, are facilitated through the existing banking system. These schemes offer flexibility in terms of loan repayment schedules and timelines. With a plethora of uncertainties in the UK’ economy, the asset (loans) of the banks have already increased. The government must intervene to ensure that these assets should not convert into non-performing assets or bad assets else it could trigger another financial crisis.
UK lenders primarily facilitated the subscription of several government backed support schemes during the unprecedented crisis. Most of the Britain’s largest banks have put aside billions of pounds as a provision to help cover potential loan losses during the first quarter of the unparalleled catastrophe. UK lenders believe that it would be harder for borrowers to repay their debts amid the economic downturn caused by the coronavirus pandemic outbreak.
Metro Bank PLC (LON: MTRO) stock traded at GBX 112.05 on 4 August 2020 at 1:16 PM, up by 1.86 per cent from the previous day’s close. The 52-week low/high price was 71.00 / 312.80. It was having a market capitalisation (Mcap) of £189.66 million. The company recorded a negative return on price, which was 47.42 per cent on a YTD (Year to Date) basis.
P2P lenders have an absolute advantage of technology over conventional banks. During this unprecedented crisis, P2P lenders are well-placed to adapt to remote working as they have excellent technology to bolster their deliverables. People, at the comfort of their homes can access money. The niche segment seems to have proven its metal so far, in the coronavirus induced crisis. Meanwhile, the conventional banks such as Metro Bank are chalking out plans to enjoy the best of both worlds.