Consumer trust for finance firms has never been high, and since the financial turmoil at the end of the previous decade it has reached rock bottom. But there is a new breed of financial services firms winning trust and business.
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Technology specialists are providing peer-to-peer lending platforms online so lenders and borrowers can be matched up quickly, and the model has received backing from the government.
The platforms are used by the government for lending, and its stamp of approval indicates the importance of the model to economic growth.
The government wants banks to lend to small and medium-sized enterprises (SMEs), but they have been keeping their purse strings tight since the credit crunch.
Government-owned British Business Bank, which was set up in 2012 to make more credit available to SMEs, uses several peer-to-peer lending platforms including Zopa, Funding Circle, Ratesetter and MarketInvoice.
A spokesman at the bank said its key objective is to create a more "diverse and vibrant" finance market for smaller businesses, with a wider choice of options and providers.
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"By supporting and catalysing the development of new and innovative online platforms, we are helping this area of the market to develop more quickly and sustainably, enabling greater provision to such businesses,” he said.
For example, MarketInvoice's investors buy invoices from SMEs through the firm's platform, which carries out risk checks. The investors get a fixed commission on top of the repayment when the invoice is settled.
The government wants SMEs to have credit to help them survive and grow, so by ensuring SMEs get invoices paid quickly is good for the economy. But many of the invoices bought on MarktInvoice are from SME suppliers to the government.
The British Business Bank told Computer Weekly: “All returns are re-invested into funding schemes to provide further finance to smaller businesses to generate a return to the taxpayer in the long term.”
Lending clubs on the rise
These lending clubs are growing fast. MarketInvoice, which was set up in 2011, has so far enabled loans worth £323m to be made to small businesses. But the company is growing fast with £200m of the total being completed in the past year alone.
On average, loans are repaid in 40 days and the company said only 1.9% of loans have been defaulted on to date. The average amount of the loans it transacts was £65,000.
MarketInvoice CTO Matt Gatrell said the company’s biggest challenge is scaling up to meet demand. But being an IT-based business in the cloud, MarketInvoice has scalability in its DNA.
Some firms are already giants. US peer-to-peer lending company Lending Club was launched in 2007 and in December 2014 it had a stock market value of about $8.5bn.
Big tech companies like Apple and Google have huge cash reserves, are not handicapped by expensive to maintain legacy systems and are not as heavily regulated as banks.
There is also a generation of new challenger banks being created, which often use the latest technology to meet consumer behavioural habits and are focused on fewer products.
One source in banking expects consumers to use lots of different financial service providers, rather than largely dealing with one or two large banks.