Platforms gear up for battle against banks

Peer-to-peer lending platforms are raising their target returns in order to compete with banks in a higher-interest-rate environment.

Following a series of base rate hikes, high street banks have begun to raise the rates offered on standard savings accounts. By mid-July, a number of instant and easy access savings accounts were offering savers 4.5 per cent, while a two-year cash ISA was paying 5.8 per cent.

In the previous era of historically low interest rates, P2P lenders were able to beat the highest bank rates by at least a few percentage points. However, the gap between bank returns and P2P returns has begun to narrow.

Read more: FCA ramps up pressure on banks to pass on higher rates to savers

According to the latest Peer2Peer Finance News data, the average Innovative Finance ISA (IFISA) was offering target returns of 8.86 per cent in July 2023. At least seven IFISA providers were promoting target rates of 5.8 per cent or lower.

However, platforms have begun to review their offerings as the competition for investor money heats up.

“Investors have much more choice at the moment, which is fair enough as they have had to live with low interest rates for many years,” said Chris Brown, head of lending and operations at P2P pawnbroking platform Unbolted.

“We have increased our target lender rate already this year from 7.8 per cent to 10.2 per cent and continue to monitor.

Read more: P2P firms looking to grow need to raise rates or attract HNWs, says 4th Way

“Bank savings aren’t really a direct competitor, they’re a different product, but P2P needs to offer a good premium over and above what the average customer can get on a one-year fixed savings rate on the high street. At the moment that looks like around 5.25 per cent per annum, so our 10.2 per cent offers value for an appropriate proportion of an investor’s available capital – it’s all about diversification.”

Unbolted is just one of the P2P firms that has opted to increase its target returns following the Bank of England’s monetary tightening.

Soon after the central bank raised the base rate to five per cent in June, property lender easyMoney hiked its rates for the fourth time this year. For investments of £100 or more, the new target rate is 5.28 per cent. For investments of £20,000 or more, the new rate is 6.27 per cent, and for £100,000 or more, it is now 7.26 per cent.

Folk2Folk has raised its target returns from 6.5 per cent to 8.75 per cent, while CrowdProperty increased its target returns to between eight and nine per cent in May, before hiking them again to 10.5 per cent in July.

“The UK remains in a higher interest rate environment, with inflation remaining stubborn,” said a CrowdProperty spokesperson.

“Recent headlines have been centred around businesses (including some of the country’s biggest banks) being challenged on profiteering in this market by dragging their feet on updating their customer offers – whether on savings rates, prices at the pump, or on the supermarket shelves. As a leader in the industry, CrowdProperty is constantly reviewing evolving market needs, risks and pricing to ensure the business is providing the best value to its customers.”

Some P2P stakeholders have claimed that higher rates are necessary to attract new investors, especially after investor incentives were banned in the latest swathe of stricter rules on the sector.

While UK platforms can no longer offer refer-a-friend and cashback offers in a bid to compete with bank savings rates, their overseas counterparts are making the most of these to enhance their investor proposition further.

Last month, Dublin-based lending marketplace Lendermarket rolled out a five per cent cashback offer, saying that “the primary reason behind this move can be traced to the recent changes in the risk-free interest rates by the central bank.

Read more: What stricter rules mean for P2P cashback deals

The platform noted that the base rate rises had “sparked a heightened level of competition amongst retail banks, as they strive to keep pace by increasing their deposit interest rates.”