Angus Dent, chief executive of peer-to-peer business lender ArchOver, explains how P2P is attracting the next generation of investors and savers

As inflation grows ahead of expectations, far too many savers are seeing the value of their hard-earned cash decline.

Recent research from the Financial Conduct Authority (FCA) found that just under a third (30 per cent) of UK adults would not be able to cope if their mortgage repayments increased by £50 a month. With the recent 0.25 per cent rate rise, it won’t be long before these households feel the squeeze. To add insult to injury, the rate rise is not being passed on to savers, and the chances of interest rates catching up with inflation any time soon are extremely slim.

There’s no room to breathe in the current system. UK households can’t build a proper financial buffer with their low interest rates, and it’s even harder to achieve a decent return on investment.

ArchOver’s ‘Next Gen: Investors and Savers’ report, which explores the investing and saving behaviour of UK adults, illustrates that the response to these challenges has been mixed to say the least.

We’re told that millennials are stuck in a financial rut, trapped by high property prices and low wage growth. In reality, however, it appears that a larger proportion of millennials are putting their money to work than older generations, getting higher returns on their investments and being bolder with their portfolio options. The rise of a subscription-service mentality means the ‘digital native’ generation is pushing the boundaries, more willing to make short-term, high-yield investments.

Caution and safety

Despite this growing willingness to consider new investment options, the overwhelming reaction to change across all generations thus far has been to bury our heads (and money) in the sand and hope for a sunnier day.

In total, two-thirds (67 per cent) of UK adults see themselves as savers. This is a group that is using savings accounts and pension funds to sit on their cash. It’s human nature to be careful in a crisis and they like the security these options provide. Well over half of savers associate the word ‘savings’ with ‘security’. The danger for these savers, though, is that they risk seeing their nest egg dwindle away over time as inflation and low interest rates eat away at their money. They are being led down the primrose path by deceptively ‘safe’ banking options.

On the other hand, the remaining third (33 per cent) of UK adults see themselves as investors, using riskier avenues like stocks, shares and property to grow their investments. They’re bolder than their counterparts, but still more than half associate the increased risk with uncertainty and caution.

As a result, the majority will only put their cash in traditional investments that they’ve used before, or that a friend would recommend to them. The legacy of economic instability from the global financial crisis in 2008, alongside political uncertainty in the form of Brexit and Trump, is making investors wary. Until they can get greater clarity, even the UK’s most adventurous investors are playing it cool.

Diversifying your portfolio

Both of these camps could make a change. There are other ways to balance security and risk in order to maximise returns without putting their capital in too much danger. In a challenging economic environment, savers and investors need to broaden their options and embrace alternative forms of finance.

At the same time, the peer-to-peer lending sector has been steadily maturing over the last five years. P2P is leading the charge in alternative financing options for UK adults stuck in a financial rut. Rather than committing their money to the banks and hoping for the best, P2P lets people put their money into investment options they believe in and can trust to grow, helping them to boost their returns at an acceptable level of risk.

As investors and savers look to break out of the cycle of low returns, P2P is set to be a key part of the next generation of investment in the UK.

The rise of P2P

For example, UK savers and investors are showing a willingness to embrace P2P lending. When thinking about their money, six in 10 (64 per cent) respondents would be willing to lend to family or friends if they gave their word they’d pay the money back. This rises to 68 per cent for savers and sinks to 54 per cent for investors.

UK savers and investors are also willing to back British businesses. Six in 10 (63 per cent) would be willing to lend to a business. Over a quarter (26 per cent) would lend to a business that could use their assets as security. A quarter (25 per cent) would lend to an established business that has been operating for a few years and 11 per cent would lend to a start-up business.

However, while the number of investors willing to lend to a business rises to 90 per cent, the number of savers is just 50 per cent. When it comes to P2P, investors are leading the way. Over half (54 per cent) claimed they would put money into the new Innovative Finance ISA (IFISA) if they had the disposable income available, since it offers a higher return on their savings (63 per cent), higher levels of interest payments per year (42 per cent) and because they have more confidence in the P2P sector now certain platforms have been approved by the FCA (31 per cent).

Understanding a new sector

Yet more than a third of investors (39 per cent) are still nervous about the risk of losing their money. Over a third (37 per cent) are still concerned that they don’t fully understand the sector and just under a third (31 per cent) still don’t see P2P as a fully regulated sector.

Ultimately, P2P is still likely to attract those with less need for security, as continued uncertainty around the maturity of the sector has yet to wash away. In contrast to investors, just over a third (36 per cent) of UK savers would put their savings into an IFISA if they had the disposable income available. This is despite 61 per cent of savers recognising that they would achieve a higher return on their money and 42 per cent acknowledging that it would offer higher levels of interest payments per year.

However, the majority (57 per cent) are held back by the fact they still don’t understand the IFISA and 48 per cent are nervous about the risk of losing their money. Further education and assurance is needed to shake UK savers from their stasis and encourage them to embrace new saving vehicles.

P2P lending may have been seen as an uncertain option for a decade. Now, as investors continue to experience rock-bottom interest rates, and City watchdogs approve new forms of alternative finance, P2P is coming of age as an alternative asset class. Institutional investors are now being attracted to the sector, with high-profile fund managers like Neil Woodford and Artemis investing in RateSetter. However, this is only the beginning. No wonder it is one of the fastest growing markets in the UK.

P2P and the future of investing

As the country continues to recover from the aftershocks of 2008, people’s propensity for risk doesn’t have to change, but the contents of their portfolios should. The financial crisis has sparked a decade of change and we’ll see high-return, high-security P2P options leading the way to higher returns as part of a diverse portfolio.

P2P has already benefitted many areas. It has advanced day-to-day business lending, provided new routes to finance, and supported innovation among British businesses. The list goes on. But the full extent of its potential for savers and investors has not been realised. Not quite yet.

For many, P2P is still seen as a new concept and there has been a desire to cling onto traditional relationships with bank managers, but times are changing. P2P lenders are now established businesses, many of them operating for at least eight or nine years. With new P2P business models in place, savers and investors can have confidence in the security of their funds at a time when rates of interest remain extremely low.

What’s more, despite our research pointing to a millennial boom in alternative investing, Gen X is the most strongly represented group on the ArchOver platform. There may be a gap between what people say they do with their money and what they actually do – but what we can say for certain is that P2P is not constrained to one generation. Millennials and Gen X are both showing interest in the benefits it can bring and are starting to broaden their portfolios.

Our research shows how the UK population is behaving now, but it also points the way forward. The good news is the need for security naturally decreases when individuals and businesses recognise that they are not operating in their normal climate. It is time to educate investors and savers on how new investment options could help them make the most of their money.

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About the research

ArchOver commissioned independent research firm, 3Gem, to survey 2,000 UK adults about their attitudes towards risk and investment in the current climate. The research explored whether economic uncertainty, political decisions, interest rates, inflation changes and housing market conditions are driving a new appetite for investment. It also considered the various behaviours and attitudes of investors and savers towards the alternative finance market.