Funding Circle takes risk with Santander tie-up.
I am an Analyst specializing in the Retail Banking sector, having joined Datamonitor Financial in 2011. I have authored ...
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A proposed tie-up with Santander will increase the lending capacity of Funding Circle; however, it may be to the detriment of its retail investors – who are the lifeblood of the platform.
Reports suggest that Santander is looking to join forces with Funding Circle, a UK-based peer-to-peer (P2P) lending platform, to open a new route into the SME lending market. Santander has identified business lending as a key growth area and has set a strategic priority to be the “SME bank of choice.” It has increased lending to SMEs by around 20% per year over the last four years, and is now looking to lend to businesses through Funding Circle’s P2P network.
The P2P lending concept is based on the idea that both investors and borrowers get a better deal by cutting out banks from the lending process. A move to include Santander as an investor will certainly raise criticism.
The details of how the tie-up would work have not been released; however, there appear to be two options. First, Santander could lend a certain percentage of a loan (e.g. 20%) at the average interest rate set by retail investors, similar to how the government currently lends on the platform. The problem with this option is that it could lower investor yields, as the same number of retail investors will be bidding against each other for a smaller loan.
Alternatively, Santander can bid for loans in the same way ordinary retail investors do. However, the issue here is that Santander’s commercial presence would effectively dictate lending rates and have an exaggerated influence on the lending process.
For Funding Circle a tie-up with Santander represents a significant risk. The benefit of increasing its lending capacity may be offset by alienating its primary customer base.