Encash: a new rival for Zopa, RateSetter and Funding Circle

As peer-to-peer lending continues to grow, a new brand is launched to compete with Zopa.

Things are getting rather exciting in the world of peer-to-peer lending (P2P lending), also known as social lending.

Zopa, the pioneer in this space, claims it has more than 1% of the UK personal loan market, and the competition is hotting up. This week saw the launch of a new brand, Encash, to compete with Zopa.

I’m not surprised that this is happening. The peer-to-peer concept – ordinary people lending to other ordinary folk via a website – is simple and attractive. The nasty banks are cut out of the deal while borrowers and lenders can both benefit from attractive rates. You can find out more about the industry in We don’t need the banks.

Encash

In this article I’m going to focus on a new brand that has launched this week. It’s called Encash. 

It’s different from Zopa because it’s aimed at a different kind of borrower.

Zopa is focused on borrowers who have excellent credit ratings. That makes a lot of sense because it means that few borrowers default and lenders can be confident that they’ll get a decent return.

Encash says that it’s aiming at borrowers in the ‘middle market.’ There are around ten million people in this bracket and while they don’t have perfect credit ratings, they’re still pretty good credit risks.

Most people in this category are earning between £20,000 and £35,000 a year and are in jobs such as nursing, teaching and the civil service. They won’t have defaulted on any loans or been hit by County court judgements for the previous two years.

If people in the middle market applied for a conventional personal loan, they’d probably get one, but they wouldn’t necessarily get the market-leading rates. Instead they might be asked to pay 10% or more in interest.

You’d expect more borrowers on Encash to default than on Zopa, but equally the borrowers will be paying a higher rate of interest. So lenders will, in theory, receive a bigger return  to compensate for the extra risk they are taking.

Not new

But will the theory work out in practice?

I should say at this point that Encash isn’t an entirely new business. It’s a rebrand of another social lending business called Yes-Secure. And bluntly, Yes-Secure has been a failure. Over the last year only £500,000 has been lent on Yes-Secure whereas £8.2 million was lent on Zopa in January alone.

Chandra Patni, the CEO of Yes-Secure/Encash, says the problem has been that Yes-Secure was facilitating loans to high-risk, sub-prime borrowers where the risk of default was high. That high risk has put off lenders.

That’s in spite of the fact that lenders have, according to Patni, done pretty well overall.

Before defaults, the average annual interest rate on loans was apparently 23% and the average default rate was 8%. So Patni says that the average lender should have earned around 20% a year. That’s a nice return for the lender but, given the default rate, it may have been accompanied by a fair amount of stress as well.

So Patni now thinks it makes more sense to aim at less risky borrowers – the ‘middle market’ I talked about earlier.

Borrowing

So should you borrow on Encash?

If you need to take out a loan, then Encash is worth considering. Just make sure that you also check out rates for conventional personal loans as well as other social lending websites such as Zopa and Ratesetter. Normally it makes sense to go for the lowest interest rate but that’s not always the case. Read more in The Loan Arranger Rides Again!

Lending

And if you have some cash to spare, should you lend on Encash?

Well, Patni says that lenders can expect a return of 10-15% a year, but there are several strong arguments against.

For starters, Yes-Secure has clearly struggled, and we don't know whether Encash will do any better. In a year, we’ll have a better idea about the default rate and whether the business looks secure and stable.

As with all the other P2P sites, Encash isn’t protected by the Financial Services Compensation Scheme (FSCS), so if a borrower defaults, you don’t get your money back. It’s also worth noting that another social lending site, Quakle, went bust last year.

What’s more, the three leading P2P sites – Zopa, Funding Circle, RateSetter – have set up a trade body called the P2P Finance Association. To join the association, sites need to adhere to strict rules on capital requirements, complaints handling and credit assessments. Encash/Yes-Secure isn’t a member of this association.

We’ve also had some negative comments about Yes-Secure from lovemoney.com users. One advised readers to ‘avoid it like the plague.’

Lending money on Zopa, Funding Circle and RateSetter is definitely riskier than putting money in a savings account, and lending with Encash is riskier than lending with Zopa and the other two leaders. Most people will probably want to keep away.

The future

That said, the mooted returns for Encash sound good, and I confess I’m a little intrigued. I’m also in little doubt that P2P lending as a sector will continue to grow. So over the next week, I’m going to take the plunge and lend some small sums on Encash and at least two other P2P sites.

Over the next year, I’ll report back on how things are going….

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