Even before the financial crisis, many borrowers were unhappy with the high interest rates charged by banks, while savers felt they weren't getting paid enough on their deposits. The crisis only made things worse but also gave birth to one of the most exciting trends in banking: the rise of peer-to-peer (P2P) lending, also known as crowd lending.
P2P still relies on the age-old concept of pooling savers' resources and lending them on, but cuts costs by eliminating the middleman, enabling savers and borrowers to interact directly.
There are now several P2P firms in Britain. Among the first was Funding Circle, co-founded by Samir Desai, which allows individuals to lend to small businesses. The idea for Funding Circle ironically enough came from a failed attempt by private-equity firm Olivant to buy the stricken bank Northern Rock (now part of Virgin Money) in 2008.
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Desai was part of the Olivant team looking into the deal. It brought home to him the inefficiency of both Northern Rock and the banking sector as a whole. He was shocked at the "lack of transparency" and the "low return" savers received on their money. Borrowers also got a bad deal, especially those too small to raise money on the bond market.
Desai saw "huge opportunities" for anyone who could use technology to bring the two parties together, so he began quietly approaching the financial regulators to see whether they would allow him to do so.
After months of investigation, the Financial Services Authority (which has since morphed into the Financial Conduct Authority,with part of its responsibilities transferred to the Bank of England) concluded Desai's vision "would be outside their remit".
With this potential barrier gone, Desai started planning in earnest. He enlisted two friends from his student days at Oxford: James Meekings and Andrew Mullinger. In August 2009, he took the plunge, quitting his job. It was "a scary thing to do", he says, but he had "always wanted to run a business".
The three friends used an initial investment of £700,000 from angel investor John Moultonto build up the infrastructure and to keep the service free for the first savers who used it after the launch in August 2010.Funding Circle even offered cashback to savers on new loans they made in effect paying them to lend.
As a result, the amount invested surged. By the end of the year, Desai had accepted a further investment of £2.5m from Index Ventures. Since then the firm has grown beyond Desai's "wildest imagination".
It has lent over £200m, providing investors with a return net of fees and defaults of 5.7%. Growth continues, with Funding Circle recently raising £23m to expand into America. It also plans to launch loans for commercial property to widen its appeal.
Desai still finds the challenge of being the boss exhilarating. While banking is still largely an "old-school profession", he believes this is changing.
He compares the rise of P2P lending to that of digital music service iTunes: he expects established players to fiercely resist it, only to embrace it out of necessity eventually. This, he says, shows that you should "keep going even when everyone tells you it is a bad idea".
