ratesetter

P2P Lending Marketplace Ratesetter Turns Five

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Ratesetter LogoThis week UK p2p lending marketplace Ratesetter celebrates its 5th anniversary. When Ratesetter launched in 2010 it introduced the concept of a Provision Fund to p2p lending – an idea that has been adopted by several UK marketplaces since. The Provision Fund now stands at over £16m, the largest in the industry, and has ensured that so far no individual investor has ever lost a penny.

Since 2010, the fast-growing platform has delivered 815M GBP in loans to individuals, businesses and sole traders and expects to lend 500M GBP this year.  While most loans are used to buy a car (28%), to pay off more expensive credit card balances (18%) and for home improvements (17%), RateSetter’s 160,000 loans have funded things as diverse as a mobile pizza kitchen that operates from the back of a Land Rover, a didgeridoo and a wind turbine.

Over 26,000 people currently invest with RateSetter, a number that is growing.  In total, investors have earned 25M GBP in interest by using the platform. Continue reading →

Ratesetter Changes Bidding Mechanism

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Ratesetter LogoThe way bidding works at p2p lending service Ratesetter will change on June 24th. Ratesetter informed investors

Currently your money is re-invested at the higher of “Your Rate” (i.e. the rate you have specified) or “Market Rate” (i.e. the rate that is worked out daily at RateSetter looking at the whole market). Once re-set to Market Rate it stays at that rate which resulted in some scenarios where your money could be sitting at Market Rate unmatched when in actual fact your specified rate was lower.

From 24th June, your money will simply be put on the market to be re-invested at your specified rate. Simple as that.

It is worth saying that if the highest borrower bid at the time of your re-investment is higher than your specified rate, your money will be matched at that rate.

So, we hope that you can now use the “Your Rate” functionality to better control the rate at which you re-invest. One way of looking at it is that is like a floor – you will get at least your rate, or the best borrower bid if that is higher.

There has been some discussion among investors what this means and what actually changes for investors. The way I interpret it (but I am not even a Ratesetter investor) is that the market rate will become less important as Ratesetter could advice the borrower at what rate his loan request would match instantly. Since many investors will not micro-manage their set rate and only login occasionally it will lead to a broader distribution of interest rates set as ‘Your Rate’ and thereby reduce volatility. E.g. should interest rates move upward on the market (for whatever reason), unchanged ‘Your Rates’ at lower levels from earlier times will delay and slow the rise (provided they have unused cash from repayments in their accounts).
But let’s hear opinion of actual Ratesetter investors in the comments, please!

Queue Up for P2P Lending!

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When was the last time you stood in a long line outside your bank branch, patiently waiting to deposit money into your savings account? Imagining a scene like that seems ridiculous at a time with near-zero interest rates in an increasingly large number of developed countries.

But there where you would least expect it, in the Fintech world of fast-moving bits, some startups actually are imposing measures to throttle influx of investor money in order to balance it with borrower demand. Welcome to p2p lending (short for peer-to-peer lending). The sector is experiencing tremendous growth rates. With attractive yields for investors some platforms struggle to acquire new borrowers fast enough for loan demand to match the ever-rising available investor demand.

One challenging factor is deeply ingrained in the business model of p2p lending marketplaces: once a new investor is onboarded and found the product satisfactory, he is most likely to stay a customer for years to come and reinvest repayments received and maybe the interest also. On the other hand the majority of borrowers are one-time customers. They take out a loan typically just once. While it may take years for the borrower to repay that loan, in most instances there is no repeat business for the marketplaces. So the marketplaces have to constantly fire on all marketing cylinders to win new borrowers in order to keep up and grow loan origination volume.

This has sparked some outside of the box thinking, e.g. the partnership of Ratesetter with CommuterClub to win their loan volume, which is in fact mostly repeat business.

Winning investors has been relatively easy for many of the p2p lending services in the recent past. Investors are attracted typically through press articles or word of mouth. One UK CEO told me he never spent a marketing penny ever to acquire investors.

But what happens on the marketplace, when there are so many investors waiting to invest their money in loans, but loans are in short supply?

  • If the marketplace does nothing or little to steer it, then those investors that react the fastest, when new loans are available, will be able to bid and invest their money. This is the situation e.g. on Prosper, Lending Club and Saving Stream.
  • The marketplace has some kind of queuing mechanism. This is typically coupled with an auto-bid functionality. Examples of this are Zopa, Ratesetter and Bondora.
  • The investors are competing during an auction period by underbidding each other through lower interest rates. Examples of p2p lending services with this model are Funding Circle, Rebuilding Society and Investly.
  • The marketplace can lower overall interest rates to attract more borrowers while the resulting lower yields slow investor money influx.

The UK p2p lending sector is eagerly awaiting the sector to become eligible for the new ISA wrapper. Inclusion into the popular tax-efficient wrapper will attract an avalanche of new investor money to the platforms.

“That’s going to be a challenge for the industry,” said Giles Andrews, CEO of Zopa. “Once the dates are worked out, the industry will need to plan for that together, and we may have to do something we have never done before, which is to limit the supply of money. It’s not good to have people’s money lying around [awaiting new borrowers] or to lower standards of borrowers.”[1]

So there is some speculation that UK p2p lending services could impose temporary limits on new investments.

The investor viewpoint

The aim of the investor is to lend the deposited money easy and speedy into those loans that match his selected criteria/risk appetite. Idle cash earns no interest and will impact yields achieved (aka cash drag).

For the retail investor none of the above mentioned mechanisms are ideal. The “fastest bidder wins” scenario means he would either have to sit in front of the computer most of the time or be lucky to be logged in just as new loans arrive. The queuing mechanisms are disliked as they can prove to be very slow in lending out the funds and can be perceived as nontransparent (see the lengthy and numerous forum discussions on the Zopa queuing mechanism). Underbidding in auctions does provide the chance to lend fast, but at the risk of setting the interest rate too low and this requires a strategy and can also be time consuming. Continue reading →

How I Explored P2P Lending – My Review Part II

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This is part II of a guest post by British investor ‘GSV3Miac’. Read part I first.

Most of my concerns about P2P lending revolve around its relative immaturity. Even ZOPA, the oldest in the UK, has only been around 10 year or so, and have changed ‘just about everything’ at least twice. Funding Circle (“FC”)have 3-4 years history, but there have been no two years where the business has actually been stable (maximum loan sizes, loan terms, Institutional participation, etc. have all changed pretty much continually over the period I’ve been investing). How well the companies, and their borrowers, would survive a real recession, can only be guessed at.

What do I actually invest in? Well practically anything if the rate looks good. My ‘core holding’ is in RS, but there is nearly as much spread across the P2B platforms. For extra P2P related risk (and maybe reward) I also signed up to invest in the Assetz and Commuter Club capital raises (via SEEDRS). With EIS investments some of the money at risk is renated tax, which you had a 100% certainty of losing to the government anyway.

I do not plan to hold most of my investments (particularly in FC) for the full 5 years. After a few months the financial data is well out of date (much of it is already out of date when the loan is approved!) and unless you want to spend time checking how the company is doing, it is easier to sell the loans on and start anew.

Similarly if rates start to move dramatically, it’s time to ‘flip’ or ‘churn’ .. selling a 7% loan part when rates move to 9% is possible, but might sting a bit. Selling a 7% loan part when rates have moved to 14% is going to hurt a lot, or might be completely impossible. If rates move the other way, selling a 7% loan part when average rates are 6% is not only easy, it may be profitable (assuming the platform allows marking up). You might wind up with un-invested funds, but as someone succinctly put it on the P2P forum, ‘un-invested is a lot less painful than lost’.

The future looks equally interesting .. we are promised P2P investments within an ISA (do NOT hold your breath, this seems to be moving at a glacial pace so far), which could result in a ‘wall of money’ arriving on the scene. We are promised P2P losses to be tax deductible (against income, rather than capital gains), which has an impact on the worth of a protection fund. We will inevitably see some new entrants appear as the P2P area grows and become more attractive (Hargreaves Lansdown, a very large fund management player, has already indicated they might get involved, I believe). We will equally inevitably see some more of the current players merge or vanish, and many of the loans default.

As I may have mentioned a couple of times, nothing has been very stable so far .. most of the platforms are still ‘feeling their way’ with immature software (this is polite-speak for ‘bugs’), and business models/systems which are still evolving. The basic P2P premise of connecting people with money with people who want it, without too much activity in the middle, does not appear to scale too well when the number of each side get big (a million people bidding to fund a thousand loans each day is not something to contemplate lightly). Platforms need to grow to survive and they need to grow in balance – if they double the number of lenders, they need twice as many willing borrowers, and vice versa .. Asymmetrical growth just annoys whoever is on the surplus side, distorts the rates, and results in no growth at all – you need both a lender and a borrower to have any business. It is obvious, but very hard to manage. Continue reading →

How I Explored P2P Lending – My Review Part I

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This is part I of a guest post by British investor ‘GSV3Miac’.

About the author.. I spent 25 or so years in software engineering, programming everything from IBM mainframes to microchips in early Hotpoint washing machines. I must have been halfway competent (or not) since I wound up managing a software development group, a large IBM computer centre, workstations of networks and PCs. When my (American owned) factory shut down I spent the last year (in between managing the closure) retraining as an IFA. I qualified, but I never actually practised – I took my redundancy / pension and headed for the hills (of Shropshire). That was a while ago, so don’t expect me to know chapter and verse on the latest tax wrinkles! *grin*

How did I get into P2P (misnamed .. it’s largely P2B these days .. much of is headed for B2B!) lending? Blame my mother .. she died, and left me a sum of money which was not expected, and not really critical to my future. Having no children (there being, IMO, no people shortage on the planet) it is probably all headed for charities one day, so I thought I might as well have some fun with it. Before I did that, I had, of course, gone through the approved checklist .. i.e.

‘Emergency’ easy access cash account(s) .. tick.

Pay off the mortgage .. tick.

ISA(s) .. tick

Pension Provisions .. tick

Stock market investments / bonds / shares / funds ..tick

OK, anything left can be risked a bit. (I accept that stocks and shares and even cash has =some= risk attached, but now we are looking at ‘high wire with no net’ type options .. VCTs, EIS schemes, and yep .. P2P lending). If you want to plan for ultimate disaster (Ebola pandemic, nuclear war and global financial meltdown) then probably investing in long dated canned food, and an underground shelter on an island upwind from everywhere, is your best bet. More modest (and likely) risks can be mitigated by spreading your investments around a lot, and by being conservative in your assumptions of what you might get back.

I started my P2P journey (in 2013) with Funding Circle (henceforth ‘FC’) and ZOPA, both of which I had heard about from a friend, and I dipped my toes in rather gingerly at first. ZOPA had been going for some time, and I probably missed their best years (when you could decide who to lend to, and later when you could at least still decide at what rate you’d lend). ZOPA had just introduced their ‘safeguarded’ lending, and started fixing the rates, so even their name (‘Zone Of Possible Agreement’) no longer made sense. I stopped lending with them after less than 6 months .. the rates were just not attractive (and unpredictably so). On the plus side, the exit from ZOPA was fairly cheap and painless.

As an alternative to ZOPA I went to look at Ratesetter (RS), which still lets you set the rate(s) you are willing to lend at over 1,3 or 5 years (or monthly). No control over who gets it, but at least some control over what they pay; and (like modern ZOPA) there is a provision fund which should hopefully protect you from bad debts. Exit from RS can be quite expensive though, so best to lend for no longer than you are sure you can do without the money for. Basically they charge you the difference between the rate you would have got for the actual period you lent for, and the rate you got by lending for a longer period. I still like them, for simplicity with just enough control to make it interesting, and I lend / recycle in the 3 and 5 year markets depending on the rates at the time (typically I expect at least an extra 1% for signing up for the extra 2 years). Continue reading →

Transparency in Credit Management; Risk Management at RateSetter

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This is a guest post by Kevin Allen, Head of Insight at RateSetter.

Credit management and consumer trust: the words are inexplicably linked for the majority of financial services providers, particularly those dealing with personal finance. In fact the approximate to translation of the Latin “Creditum” meaning a loan is to the French “crédit” meaning trust. There is little doubt that consumers are increasingly alive to the mechanics of how institutions are looking after their hard-earned money – something that has stemmed from the global financial crisis when banks were guilty of lending household savings to all sorts of risky endeavours, with well documented results.

There is no clearer example of the importance of credit management than within the peer-to-peer lending industry. In the absence of the Financial Services Compensation Scheme, the biggest single risk to lenders is that borrower defaults reach a level so severe that it absorbs not only the interest they might earn but their capital as well. RateSetter were the first peer-to-peer company globally to introduce the concept of a provision fund that provides lenders with an added level of control against loss of even the expected interest amount.

The provision fund has proved very successful, not only in providing lender confidence, but also in terms of its track record. We also aim to gain depth and breadth to our lending portfolio through an evolution of our offering. This will always include our core consumer lending offering for customers to buy cars, make home improvements and consolidate expensive credit card debt, but will include property development and commercial business lending to support the UKs SMEs.

RateSetter aims to continue this growth to provide more confidence to prospective and existing lenders and to ensure we can maintain our “every lender, every penny” through all economic cycles. Although as we always say, we cannot guarantee anything. And our lenders will also be diversified to include individuals, charities, institutions and businesses. The breakdown currently shows us as potentially the only P2P lender in the UK whose recent lending is dominated by individuals;

Ratesetter loanbook

So, although a peer-to-peer lender can rely on us to manage the Provision Fund, this leads us to the natural questions: who exactly am I lending my money to? And, how much are they contributing to the fund? So everything we say and do is built around careful and cautious credit assessment and any potential impact on the provision fund. But, equally important to the mechanics, is the transparency for our users. While banks and building societies still, even today, maintain an impenetrable barrier for users trying to understand what is happening to their money, we have gone to the opposite end of the spectrum, making openness part of our DNA. Continue reading →