Peer-to-Peer (P2P) lender Funding Circle could be about to get into bed with Santander, reports have suggested.
Funding Circle focuses on providing loans to small businesses, and has grown significantly this year alongside its rivals in the P2P sector, such as Zopa and Ratesetter. As P2P sites cut out the middle man – the bank – and allow individuals to work together directly, these sites are cheaper for borrowers and pay out better interest rates for savers.
Funding Circle partnership
The mooted partnership was first reported in the Financial Times last week.
Such a move would dramatically shake up the P2P market and could be seen as a positive move, as it could provide more capital for small businesses to borrow.
However, right now P2P websites aren't covered by the Financial Services Compensation Scheme (FSCS), so it's unclear how Santander would manage the risk. And the partnership could also put off thousands of businesses who have used Funding Circle because they've been turned down by the high street or because they were put off by the big banks' poor reputation.
When I approached Funding Circle and Santander, both were keen to stress that the reports published so far were based on speculation.
Funding Circle confirmed no agreement or partnership had been made but Samir Desai, the group's co-founder, said in a statement that conversations were at an extremely early stage. He also explained that the company had been in talks with several different businesses since its creation three years ago - some of which were high street banks.
When a business is rejected credit from a bank, some banks will suggest they approach a P2P lender instead. It the two companies did become partners, Desai said this could be made an official policy and the bank would then fund a small proportion of that loan.
What the other lenders say
Shortly after the announcement Stuart Law, founder of Assetz Capital, said the potential collaboration would "thrust a spear" straight through the heart of the P2P community.
"Independence and a clean break from the greedy banks has been a central pillar of the alternative finance market but we're in danger of losing all the work that's been done if Funding Circle begins working hand-in-hand with Santander," he added.
Two other lenders, Rate Setter and Thin Cats, had a more positive slant on the news.
Rhydian Lewis, CEO of RateSetter, said the news demonstrates that P2P lending's dramatic growth is catching the eye of institutions. A collaboration with a mainstream bank would add credibility to the institution, he believes, and this shows how the industry is starting to take shape.
"RateSetter will always fight to ensure direct access for consumers to the beneficial returns of P2P, however the landscape evolves in the coming years, but this is an exciting development for our friends at Funding Circle," he added.
Kevin Caley, spokesperson for ThinCats, said he didn't think the big banks saw P2P lenders as a threat because of the relatively small size of this market. However, when ThinCats has previously approached the banks he said "it was clear they had lost all interest in the small business market."
"There may be other strategic reasons for the two getting together" argues Caley, such as selling the company to one of the smaller banks. He says that as Funding Circle has followed the classic venture capital funded internet start-up path, investors will be looking for an exit at some point and if it was sold, this would provide investors with an eventual exit.
How will customers react?
There are more than 49,000 savers registered with Funding Circle and since its start £129 million has been lent out. A lot of this money has gone to businesses which have been rejected for loans from the high street banks.
Lending to small businesses is at an all-time low at the moment and the Government's Funding for Lending Scheme (FLS) isn't helping the situation.
However, partnering with Santander seems to be a double-edged sword. On one hand it goes against everything P2P lenders stand for and is a sure-fire way to put off loyal customers.
On the other it will provide credibility and extra security to a niche market, which could attract more new customers.
What do you think about the potential partnership? Is it a good thing for P2P lenders of will it destroy them? Let me know in the comment box below.