JEFF PRESTRIDGE: Why I've been put off peer-to-peer lending for life

12 November 2019

I sometimes see my role as a money journalist through the eyes of a restaurant critic. That is, in order to express an informed opinion, you need first to taste the goods

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It explains why, over the years, I’ve experimented with numerous new personal finance propositions to see whether they are as good as they purport to be. I’ve done this even when I’ve had grave doubts about them. Some have come up trumps, others less so.

It explains why, for example, I have an instant access Cash Isa with Metro Bank, the bank that launched more than nine years ago in London – and has been extending its tentacles northwards ever since. Indeed, I stumbled on its Northampton branch a few weeks ago while visiting the town to see Arthur Miller’s gritty (and relevant) View From the Bridge at the town’s splendid Royal & Derngate arts complex.

Metro branches are also scheduled to open soon in Manchester and Liverpool. A bank opening branches, you may ask? Yes, somewhat unusual, although Metro is cherry-picking where it wants to be.

I didn’t take out my Metro Cash Isa to enjoy the 0.9% interest rate on offer – better rates are available elsewhere – although the tax-free Isa does provide a comforting financial war chest that I can draw upon if an unexpected bill comes my way.   

I opened it primarily to see whether the bank’s emphasis on customer service is as good as it is cracked up to be. All free pens, smiling staff (yes, smiling bank staff), dog bowls (I’m not joking), and bright, welcoming branches.

So far my personal experience has been good. Whichever branch I’ve used – primarily in London –  I’ve always received stellar service, with staff falling over backwards to assist me. I’ve even used its free cash exchange machines, which allow you to bank coins that you’ve accumulated along the way (I keep a money jar on my desk) and deposit the sum in your account.

Of course, it’s not all been plain sailing. Major financial accounting blunders at the bank early this year caused Metro’s share price to slide alarmingly, unnerving some customers. As a result, it has had difficulty in raising new finance to continue its branch expansion plans – finance that was only secured at a high interest rate, which will be a financial drag on the bank going forward.

I imagine that the City regulator will also have its say at some stage on the accounting errors – and Metro heads may roll as a result and fines be issued. Maybe Metro will lose its independence and be bought by a rival. It would be a shame because Metro has brought something positive to the high street and has raised customer service standards in bank branches to a new level.

My personal finance ‘experiment’ with peer-to-peer lender Funding Circle has lasted a while – seven years and more. On the surface it’s gone OK. I invested £200 in a basket of loans made to a variety of small businesses (selected by Funding Circle), and it’s grown in value to £270 as borrowers have repaid a slice of what I lent them – plus interest – every month.

A few of the businesses have collapsed along the way but an annual return of 4% is not to be scoffed at. It certainly looks good against the annual 0.9% interest on offer from Metro, although my Funding Circle money does not enjoy the protection of the Financial Services Compensation Scheme that I get with Metro (savings protected up to £85,000).

Yet there’s a little bit of smoke and mirrors about my investment with Funding Circle. I recently decided to terminate my experiment with the company, only to discover that getting my money back is not straightforward. Far from it. I was given two options.

Option one: I could wait for my borrowers to repay the money I lent them (plus interest) –  a process that could take more than five years to complete and leave me at risk of some of the borrowers going bust in the meantime.

Option two: I could sell my loans, via Funding Circle, to someone else prepared to take them on. Yet if I chose this route, I would get back less than my portfolio value of £270 – an ‘estimated’ £247. Furthermore, I would probably have to wait at least four months for the sale to be completed.

In Funding Circle’s defence, it did tell me it is looking at improving the “functionality of the secondary market” (option two) and that it would be letting all investors know about the “outcome” of its review. Reassuring words, but my experience with Funding Circle has put me off peer-to-peer lending for life. Investment returns on paper are meaningless if they cannot then be converted into ready pounds and pence. As I said, smoke and mirrors.

You win some, you lose some. I will continue to keep tasting the personal finance goods.