More than eight in ten savers would not consider investing their money into a savings account with a peer-to-peer lender, according to new research by uSwitch.
With interest rates on savings accounts remaining at a historic low, peer-to-peer lending has been hailed as another way to boost investments.
Interest rates on savings with peer-to-peer lending platforms such as Zopa loans can go as high as 4.9%, which trumps the average ISA rate of around 1.8%.
However, 84% of savers had concerns about leaving their savings with a peer-to-peer platform.
Of that figure, according to uSwitch, 39% are worried about the industry’s lack of regulation under the Financial Conduct Authority (FCA), which will enforce new rules for peer-to-peer lending from 1 April 2014.
Peer-to-peer lending FCA regulation
While the proposed rules will protect users who borrow money, savers will not be granted protection under the Financial Services Compensation Scheme (FSCS).
Under the FSCS savers would be granted the same level of protection they get when saving with a bank, allowing them claim up to £85,000 in the event of a collapse in the platform.
Although official figures show the UK’s peer-to-peer lending sector increased by 121% during 2013, only 2% of savers are currently using a peer-to-peer lending platform.
On top of this, a lack of knowledge of the sector is preventing 49% from investing in peer-to-peer savings.
Some may argue that the introduction of regulation on the peer-to-peer lending market from April will boost consumers’ interest in the platforms, but barriers still exist.
A quarter don’t want to lend money if they don’t know where it’s going, and one in ten don’t want to use an online platform.
Meanwhile, poor cash ISA rates have clearly taken their toll on consumers’ savings with one in four people expecting to earn no more than £50 in interest on their savings.
High-interest current accounts
As a result, consumers are looking elsewhere to stash their savings with 43% using their current account.
A further one in ten think keeping their money in a piggy bank at home is the best option when in fact this means their money is being eroded by inflation.
Almost six in ten (57%) have opted for an instant access savings account, while a third have gone for fixed term savings accounts of between 1 and 5 years.
uSwitch personal finance expert, Jafar Hassan, believes that peer-to-peer lenders need to “convince consumers that their money is safe” as long as the FSCS does not protect savers.
“People fed up with poor ISA rates but nervous about peer-to-peer lending should consider keeping their money in a high interest current account. Nationwide’s FlexDirect account offers rates of 5% while Santander 123 offers up to 3%,” Mr Hassan said.
Giles Andrews, co-founder and CEO at Zopa, conceded that peer-to-peer platforms are still a “new idea to many people” but that the services offers a “more rewarding mainstream alternative to banks”.
Despite the fact that consumers saving with companies like Zopa do not get protection under the FSCS, Mr Andrews pointed out that their Safeguard fund, which currently stands at over £2.7m, has so far guaranteed that no customer has lost their savings.