British p2p lending marketplace Funding Circle introduces a new model today. All new loans will be issued at fixed interest rates set by Funding Circle. Coming right after Funding Circle’s fifth anniversary, and 792 million GBP originated in loans to SMEs, the step to discontinue auctions is a major change in the way the marketplace operates.
Spokesman David de Koning told P2P-Banking.com that there were major drawbacks associated with the auction model for borrowers as well as lenders. Borrowers lacked certainty of the final interest rate until the auction period was over which led to some of them cancelling their loan application. Investors on the other hand experienced cash drag and sometimes had to make multiple bids to ensure they participate in the loan they wanted.
Under the new model Funding Circle will set the interest rate based on risk band and loan term. There will be 3 different rates for each risk bank. De Koning pointed out that the introduced model is not completly new for Funding Circle, as Funding Circle did already use fixed rates on property loans and on the US market of Funding Circle. Asked whether he expects loans to close instantly as demand could be higher than loan supply, he said he could certainly see loans to close quicker than before. The long term goal envisioned is that in future borrowers may pre-approve a loan before it is listed and it could close instantly once filled.Asked about the effects on the secondary market in the transition phase from one model to the other, de Koning replied that since the autobid will bid on loans listed at discount, he expects there will be enough liquidity for any investor that would like to exit.
Funding Circle is not the first p2p lending marketplace to abandon an auction model for fixed rate listings. Other marketplaces that took this step before include Prosper, Bondora and Auxmoney. There are many different ways to implement pricings mechanisms for a p2p lending marketplace. Read ‘P2P Lending: How are interest rates set?‘ for an earlier overview article on that topic.
A few thoughts spring to mind
1. Have lenders under-priced the risk, and therefore likely to face unexpected losses relative to their yield?
2. Is this the beginning of the end of crowd underwriting and pricing?
3. Is this a pre-emptive strike to remove any regulatory issues given that full permission from the FCA is still pending in the UK?
4. Will the next move to be the introduction of a default shield a la Zopa, RateSetter etc.?
After E i.e. higher risk loans were recently launched by Ebay there was an immediate increase in the use of Bots (automated bidding programmes). Small investors involvement in this sector of the market was eroded – bot users new that if they bid at the minimum set rate they could scoop that particular pool.
If all rates are to be set, bot use will inevitably increase and small investors will be squeezed out of the better loans. Once again after a short period in which their domination of the lending market place might have been perceived to be slightly threatened the big financial institutions seem to be gearing up to again call all the shots (or should I say bots).
In the longer term Funding circle will disappear into the gaping maw of one or another larger buyer.
This means that the floor of the loan are coming up.
Good for the larger lender as they want to know they don’t have to scrape the bottom of the barrel to funnel large amounts of money into a loan.
Bad for the little guy, because he can not longer bide his time and get a great rate on an undesirable loan in the market.