Cooking the Books II: Lenders and Borrowers
‘Peer-to-peer lenders given last warning’ was the headline in the Times (20 September) referring to a circular from the Financial Conduct Authority. Apparently, some of them have been pursuing ‘risky practices’. According to an earlier report in the Times (17 September), the regulator ‘believes this is being driven by pressure on many to reach profitability, resulting in them taking ‘additional opportunistic risks’ in areas beyond their expertise.’ Two, with the unoriginal names of ‘Lendy’ and ‘Collateral’, have failed.
But what are they? The Times explains: ‘Peer-to-peer platforms are websites which link retail and institutional investors with consumers, small businesses and property developers who want credit’. (‘Retail’ investors are individuals with money to lend).
A business or individual seeking money for some project applies to a P2P platform for a loan; the platform, after checking their credit-worthiness, contacts potential lenders who, individually or as group, put up the money at an agreed rate of interest. P2P platforms make money from fees for putting the borrowers and lenders in touch and for checking the borrower’s credit-worthiness. The more loans they arrange, the more their income; hence the temptation to take on ‘risky’ borrowers that the FCA criticised. They are relatively new financial institutions, the first one in Britain being established only in 2005.
P2P platforms are, then, financial intermediaries which put those with money to lend and those who want to borrow money in touch with each other. To call them ‘lenders’ is, strictly speaking, incorrect as they don’t actually lend money themselves. Even so, both for lenders and borrowers they are an alternative to banks and, at one point, were encouraged by the government precisely because of this, with the government lending to small businesses via some of them. They do directly compete with banks for the custom of those with money to lend.
Banks in fact are not all that different from P2P platforms. They, too, are financial intermediaries between lenders and borrowers. When someone or some institution deposits money in a bank, what they are doing is lending to the bank, even if they are more usually called ‘depositors’ or ‘savers’. What, basically, the bank does with such loans to it is to pool the money and then use most of it to make loans out of this pool to borrowers. Although there is no direct link between particular lenders and particular borrowers, banks still channel funds from lenders to borrowers. It’s their economic role within capitalism. Their income derives from the difference between the rate of interest they pay those who lend them money and the higher rate they charge those who borrow money from them.
Because of the way P2P platforms operate no one dares claim that the money for the loans they arrange has been conjured up out of thin air; it clearly has to already exist. Many people mistakenly think that banks can simply ‘create’ the money they lend. But this is an illusion or, in the case of currency cranks, a delusion. Banks can’t do this any more than P2P platforms can. It is just that, in their case, this is not so transparent. However, on closer examination, this can be seen to be the case. If nobody lent them money they wouldn’t be able to lend any. Banks, like P2P platforms, are financial intermediaries, not money or credit creators.