Peer2Peer Finance News January 2019

>> 7

FOOD, GLORIOUS FOOD

Food producer funding platform looks for P2P partner INNOVATIVE INVESTING

How the IFISA fits in to the wider ISA market

>> 10

Funding Xchange’s Katrin Herrling is levelling the playing field for SME finance >> 22

ISSUE 28 | JANUARY 2019

P2P set for fundraising boom in 2019 INVESTORS could be set to benefit from another bumper year of equity fundraisings in the peerto-peer lending sector.

P2P lenders raised more than £10m through crowdfunding platforms last year to boost their technology and operations, while almost £2bn was ploughed into the wider fintech sector.

P2P executives have said that the extra financial firepower offered by fundraising rounds benefits the sector’s retail investors, who can enjoy a better customer experience and greater reassurance in the firm handling their funds.

“2018 has seen nearly £2bn invested into private UK fintech and alternative

finance companies – a record amount,” Henry Whorwood, head of research and consultancy

at Beauhurst, said.

“39 fintech companies have used crowdfunding platforms to raise capital.

This is a record level of crowdfunding investment into fintech companies and we expect to see >> 4

Crowd2Fund to launch ‘contingency fund’ for investors CROWD2FUND will launch a contingency fund for investors in the second quarter of 2019, as part of a series of new features which will soon be rolled out by the peerto-peer lending platform.

The contingency fund will allow Crowd2Fund’s investors to share their losses, Chris Hancock, chief executive of Crowd2Fund, told Peer2Peer Finance News.

Investors can opt in to

the fund, which will reduce the overall value of the defaults in their portfolios. However, it will also mean that they receive a lower annual interest rate on their loans.

“It’s very simple,” said Hancock. “Everybody who wants to opt in will pay a certain amount and that will cover the forecasted losses for a 12-month period.” >> 4 Hancock also

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EDITOR’S LETTER

03

Published by Royal Crescent Publishing

WeWork, 2 Eastbourne Terrace, Paddington, London, W2 6LG info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk +44 (0) 7966 180299 Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk Andrew Saunders Features Writer Danielle Levy Features Writer PRODUCTION Tim Parker Art Director COMMERCIAL Ashleigh Sadler Director of Sales and Marketing ashleigh@p2pfinancenews.co.uk Tehmeena Khan Sales and Marketing Support tehmeena@p2pfinancenews.co.uk SUBSCRIPTIONS AND DISTRIBUTION info@p2pfinancenews.co.uk Find our website at www.p2pfinancenews.co.uk

S

hakespeare famously wrote that the course of true love never did run smooth, and the same could be said of peer-to-peer lending.

Having sprung up after one of the worst recessions in recent history, the industry has been dogged by criticism. P2P hasn’t proven itself during a financial crisis! There’s a big scandal round the corner!

The industry isn’t growing fast enough! It’s growing too fast!

Despite all this, the P2P sector has carried on doing what it does best – disrupting the incumbents, boosting financial inclusion, providing great investor returns and scaling up at a healthy pace.

Funding Circle’s chief risk officer Jerome Le Luel recently said that the P2P lender is “ready” for a recession. “We are originating resilient loans in all of our markets, and we have the right tools in place to mitigate economic stress if needed,” he wrote in a blog post on the firm’s website.

With Brexit (possibly) round the corner and escalating global trade wars, a turn in the cycle is becoming increasingly likely.

Perhaps, ready or not, a recession is exactly what the P2P industry needs now to prove the doomsayers wrong once and for all.

SUZIE NEUWIRTH EDITOR-IN-CHIEF

Printed by 4-Print Limited ©No part of this publication may be reproduced without written permission from the publishers.

Peer2Peer Finance News has been prepared solely for informational purposes, and is not a solicitation of an offer to buy or sell any peer-to-peer finance product, or any other security, product, service or investment. This publication does not purport to contain all relevant information which you may need to take into account before making a decision on any finance or investment matter. The opinions expressed in this publication do not constitute investment advice and independent advice should be sought where appropriate. Neither the information in this publication, nor any opinion contained in this publication constitutes a solicitation or offer to provide any investment advice or service.

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04

NEWS

cont. from top of page 1 more of this in 2019.”

Some of the largest P2P deals last year included Funding Circle’s £300m initial public offering, while Zopa raised £60m from a private fundraise, with more to come this year as it seeks to build a bank.

“Our main priorities into 2019 are launching our new banking products, such as the fixed-term deposits, whilst also continuing to grow and improve our P2P business,” Jaidev Janardana, chief executive of Zopa, said.

“In 2019, we will be looking to raise additional capital to meet our regulatory requirements as we fuel the fast growth of our bank.”

Other platforms have chosen to go down the equity crowdfunding route.

Landbay and Abundance raised £1.6m and £1.4m respectively on Seedrs last year, while Welendus raised £939,104.

Assetz Capital has raised more than £5m via Seedrs

over the years and is now looking to raise £400,000 on the crowdfunding platform to finance the launch of a new P2P property venture.

“We may raise further equity next year,” Assetz Capital’s chief executive Stuart Law told Peer2Peer Finance News.

“A business with a strong balance sheet is a business that is worth investing through, as is dealing with one that is in profit.”

Tom Horbye, campaigns development manager for Seedrs, said that 12 P2P platforms raised funds through its platform in 2018, raising more than £10m, and predicted that the market is ripe for more campaigns in 2019.

“As seen in the latest update from the UK Peer-toPeer Finance Association, the P2P lending market has continued to see strong growth, an attractive market signal for any growth equity investor,” he said.

“That coupled with the

recent increase in the EU prospectus limit – which increased the threshold for when those raising funds have to produce a full prospectus – will likely see later-stage P2P lenders explore equity crowdfunding as a way to allow their loyal lending customers the opportunity to own a slice of the P2P platform they use, and share in the success of the P2P lending market’s growth.”

Private equity finance has been another source of funding for some P2P platforms.

RateSetter raised £15m from private backers last year, while Lending Works secured £2.8m, led by UK private equity house Maven Capital Partners.

LandlordInvest is now following the private equity funding route after an attempted Crowdcube fundraise failed to reach its desired target.

“There are many benefits to institutional backing, namely access to more funds than equity crowdfunding platforms, as well as the institution’s network and resources,” Filip Karadaghi, managing director of LandlordInvest, said.

“More resources should, in theory, help a platform improve and grow but we have seen that resources and growth do not always lead to improvement in terms of customer experience, in the P2P industry and elsewhere.

“I believe that it ultimately depends on the company’s management and board if the company can develop and grow for the benefit of its customers and shareholders given the resources available. This applies to every industry, and not only P2P.”

This will involve increasing transparency around its recoveries process and allowing the platform’s lenders to take a more active role in how they manage defaulted payments.

“One very exciting area that we believe is ripe for

disruption, improvement and innovation is the recoveries area of fintech generally,” said Hancock. “We're going to be delivering a lot of features of the recovery side of the business which will include things like the ability to vote

on whether to go into bankruptcy proceedings and to gamify the recoveries process.

“This will really bring the investors into the recoveries process and gives them the control and influence to be a part of that recoveries process.”

cont. from bottom of page 1 revealed that the platform will be improving its automated systems to ensure that credit risk and due diligence is consistent, which will allow the firm to list more opportunities for its investors.

NEWS

05

Prodigy targets £400m of originations in 2019 PRODIGY Finance is targeting $500m (£400m) of loan originations next year, as it looks to diversify its funding sources.

The peer-to-peer lender specialises in offering student loans to people studying outside of their home country, with students typically coming from developing nations such as India or Brazil to study in the US, the UK or continental Europe.

It has lent out more than $650m since launching 12 years ago and has expanded from solely lending to MBA students into other ‘high-potential’ disciplines, such as engineering and healthcare.

Two months ago, it launched a new product, enabling students to refinance their loans.

As well as aiming for $500m of originations next year, Ricardo Fernandez, head of new business and strategic partnerships at Prodigy Finance, told Peer2Peer Finance News that the firm is renewing its focus on impact investing and retail investors.

After focusing heavily on institutions and securing a number of warehouse lines from banks, Fernandez said that Prodigy Finance will be targeting family offices and endowment funds this year, who like the fact that impact investing brings a social benefit as well as high returns.

There are also plans to launch a fund for retail investors this year. Individuals can only currently invest in Prodigy Finance through

its bonds. The Financial Conduct Authority-authorised firm has issued around 150 bonds, including an education bond in partnership with Credit Suisse, which is listed on the Irish Stock Exchange.

But Fernandez said that a fund would boost liquidity for retail investors. Student loans are typically quite long and students would take them out before start-

ing their course, meaning that a Prodigy Finance bond could have a maturity of 12 years.

In the future, Fernandez said that Prodigy Finance would like to expand its product range to become “the financial services provider for the global expat community”.

This could include home loans, personal loans and credit cards, he said.

Flender halts cross-border lending as Brexit bites DUBLIN-BASED peerto-peer lender Flender has stopped offering loans to Irish businesses which have cross-border exposure, as the UK continues to work out the details of its exit from the EU. Amid ongoing uncertainty over Brexit, Jeremy DaviesBetancourt, Flender’s cofounder and chief finance officer, told Peer2Peer Finance News that the firm was unwilling to

lend to businesses which could be affected by changes to the border between Northern Ireland and the Republic of Ireland. This may include agricultural businesses which span the border area, and haulage firms which operate across the entire island of Ireland.

“All Brexit has done is create uncertainty,” said Davies-Betancourt. “The problem for the province is its position in the eyes

of the rest of Europe. Is it really going to be seen as a separate jurisdiction after Brexit?”

However, he added that once the terms of Brexit have been settled, Flender hopes to expand its business into Northern Ireland.

“Northern Ireland is an underserved marketplace in terms of P2P,” said Davies-Betancourt. “We are looking at doing business in the North as a

first step back into the UK after Brexit.

“We like Northern Ireland just because of its proximity and its similarities to the South.”

Davies-Betancourt added that Northern Ireland is an attractive jurisdiction for businesses and investors due to its skilled native workforce and low cost of living, as well as its reduced corporate tax rates.

For even more peer-to-peer finance news, go to our website at www.p2pfinancenews.co.uk.

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NEWS

07

Investor marketing restrictions could hit pension pots FINANCIAL planning expert Anthony Carty has warned that proposed marketing restrictions could deter investors from the peer-to-peer lending sector, depriving people of a decent source of income for their retirement.

The City watchdog has proposed introducing appropriateness and categorisation tests for P2P investors, which critics argue could cut out everyday investors who would benefit from diversifying their portfolios away from stocks and shares.

Carty, who is financial planning and business development director at specialist funding and financial advice group Clifton

Asset Management, said that these proposals would be “unfortunate”, particularly for investors looking for stronger pension growth by including P2P loans in their self-invested personal pension (SIPP).

“Whilst not 100 per cent guaranteed, returns from direct lending are generally highly predictable and often backed up by some form of contingency fund in the event of borrower default,” he said.

“With average interest rates in P2P running between 3.5 and six per cent and in most cases, some form of early redemption facility, you have a pretty compelling case for pension investment by indi-

viduals looking for income in drawdown.

“Throw into the mix the investor concerns about an end to the equity bull market, and it’s not really surprising that people are looking to alternative sectors.”

Carty predicted that P2P SIPPs could soon become the pension product of choice for investors wanting to secure a decent retirement income while avoiding the volatility of the stock market.

“Because the P2P investment is held in a pension wrapper it is, of course, entirely tax free whilst rolling up, or the individual can opt to have it paid out as a monthly pension

payment,” he added.

“This avoids having to go down the annuity route whilst at the same time providing a realistic level of income.”

Clifton Asset Management includes P2P in its SIPPs through its Morgan Lloyd brand, working with platforms including ArchOver, RateSetter and ThinCats.

While P2P loans are technically allowed in SIPPs, connected parties rules stipulate that there must be no connection between the lender and borrower. This provides a challenge for SIPP providers if a P2P loan is allocated to a large number of borrowers.

Food producer funding platform eyes P2P partners A FOOD producer funding platform has expressed interest in partnering with peer-to-peer lending platforms as it looks to scale up the business.

PrimeStox, founded by mining and metals analyst Joseph Cherrez and horticulturist Jenny Louw, lets retail investors support food producers by funding production of their goods and sharing in the profits once they are sold.

Cherrez told Peer2Peer Finance News that PrimeStox’ operating model is similar to that of a P2P

lender, although the platform’s activities do not fall under Financial Conduct Authority regulations.

He said that a food wholesaler or P2P platform may be a good partner for PrimeStox as it seeks to grow.

“We are open to partnerships,” Cherrez said.

“We are currently growing slowly but if we could find a partner it would be a good way to expand.

“The original idea was a fusion of a food wholesaler and a lender.

“Working with others could help improve the stock ownership concept.”

Investors choose a prod-

uct they like and purchase it through PrimeStox, which passes the funds over to the food producer.

The producer must then estimate how long it will take to make and sell the product, and pay an agreed rate of return.

In the event that the food producer does not pay, the investor holds legal title over the product so can pursue court action or take legal ownership of the goods.

Interest on projects has ranged from four per cent to 12 per cent with around £40,000 lent on average.

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JOINT VENTURE

09

What North/South Divide?

Land values, house building and Brexit have all disrupted the traditional North/South property divide. Jay Patel, lending director at Wellesley Finance, explains why this is a great opportunity for property lenders

O

NCE UPON A TIME, the North/South divide was one of the few certainties in the UK’s property market.

Historically, properties in London and the South East (SE) were in higher demand and sold for higher prices, while in the Midlands and the North West (NW), property values were much lower.

But over the past few years, there has been a marked shift in the UK’s property market. The government’s Help to Buy Scheme has led to a rise in affordable housing across the country, while at the same time rising land values and a dearth of prime sites has pushed property developers outside of London and into the regions of England.

Wellesley was one of the few alternative lenders to anticipate this shift.

“In the early days the focus was on London and the SE,” says Jay Patel, lending director at Wellesley

segment of the market there is very little difference between the NW and the SE. “There is not really a North/ South divide in terms of lowercost housing as it is in short supply across the UK,” explains Patel.

“What varies is the land values in different regions which impact the end price of the new houses, but

“ What counts is affordability, and this is driven by the local economy” Finance. “But regional centres such as Manchester in the NW, Bristol in the West and Birmingham in the Midlands have strong local markets and a need for quality but reasonably priced housing.”

Since 2015, Wellesley has focused on lower-cost housing and in this

this variance is also reflected in the salaries and so affordability does not vary as much as one might expect.”

Furthermore, the type of housing does not vary significantly between these two regions. Patel says that Wellesley tends to fund those developers who build mainly

one and two bed flats in larger developments, which means that the core product does not vary much from region to region.

“What counts is affordability, and this is driven by the local economy in terms of salaries and the demand for housing,” says Patel. “When Wellesley started to diversify its business in 2015, we identified that there was a shortage of product in the NW and strong demand for lower-priced housing, whereas London looked stretched in terms of affordability.

“Today the developments coming on stream in the NW are starting to address the undersupply whereas the SE is looking more attractive again, particularly as many buyers in London are prepared to look a little further afield for value.”

Wellesley has approximately 23 per cent of its developments in the NW at present, and 25 per cent in the SE, but only 12 per cent in London. This is a split that Patel is happy to maintain – at least until after the UK’s official withdrawal from the EU. “The uncertainty of Brexit has been a cloud on the horizon,” warns Patel. “Property investors hate uncertainty more than anything else, but I think that once Brexit is behind us there could be more certainty in areas such as London again.”

Until then, there are plenty of opportunities for savvy property lenders and investors alike.

10

IFISA

Navigating the ISA market Traditionally, ISA users have faced a choice between saving into a cash tax wrapper or investing in stocks and shares, but now the Innovative Finance ISA is providing a middle ground. Marc Shoffman reports

C

HOOSING WHERE TO place your ISA allowance each year can be tough. A cash ISA provides a defined rate of interest but the best returns are typically below inflation.

In contrast, investors can aim for higher returns by investing in the stock market with a stocks and shares ISA. But this brings stock market volatility and the risk of losing your money, alongside fees for the investment wrapper and for a financial adviser, if one is used.

What if you could combine that fixed rate of interest with a little extra risk? Enter the Innovative Finance ISA (IFISA).

The IFISA lets investors earn their peer-to-peer loan interest taxfree. Returns range from 3.54 per cent with Landbay or 4.5 per cent with Zopa to double figures with platforms such as LandlordInvest, Proplend and Ablrate.

In contrast, the best rate on a cash ISA comes in at around two per cent.

“It may be tempting to open a basic cash savings ISA, but some

savings goals are for the longerterm, so instead consumers may wish to consider investing differently,” explains Rachel Springall, personal finance expert at comparison website Moneyfacts.

“IFISAs allow savers to invest using P2P, so for those frustrated with low returns on cash ISAs, these could be an enticing alternative.

“Savers will still earn tax-free interest thanks to the ISA wrapper, but it is worth remembering that capital is at risk and they are

IFISA

effectively lending out their cash via P2P for an interest return.”

She said cash ISA take-up has also been impeded by the launch of the personal savings allowance (PSA),

be wise to look at all the options available to them to see which would be the most lucrative based on their circumstances.

“If competition outside of cash

“ The low base rate means cash ISAs aren’t beating inflation” which lets basic rate taxpayers earn £1,000 on a savings account – £500 for higher-rate earners – before having to pay any tax.

“The influence of the PSA has dampened the popularity of cash ISAs, as savers will find better returns on non-ISAs right now, particularly on fixed bonds,” she explains.

“Therefore, if savers are looking specifically for an ISA, they would

ISA season doesn’t improve, we could see fewer subscriptions over the next few years if they continue to fall out of favour.”

The number of savers opening cash ISAs fell by 8.2 per cent in the previous tax year, which P2P lenders say has created a gap in the market.

P2P platforms see the poor returns on cash as an opportunity for their IFISA products.

11

“The low base rate means cash ISAs aren’t beating inflation,” says Stuart Law, chief executive of Assetz Capital.

“While IFISAs do carry risk, we feel they are a great vehicle to include in a diversified portfolio.

“This success is down to us providing a proper alternative and fulfilling an untapped demand.

“We aim to balance healthy returns with a degree of risk. Investors want flexibility with their investments, which is why we provide ISA wrappers on all of our accounts.”

It isn’t just those turning away from cash ISAs that could be tempted by the IFISA. Sam Handfield Jones, head of Octopus Choice, says many ISA users may also find they are putting too much into a stock and shares wrapper and want to diversify their portfolio.

12

IFISA

“A lot of people are probably overly cautious and end up with too much money in a cash ISA,” he explains.

“The alternative is a stocks and shares ISA, which the majority of advisers would encourage their clients to do as you are using the wrapper on an asset class that can target the best returns for you.

“Although that may make logical sense, there are more emotional things at play, as the idea of putting everything into stocks and shares may be too much for someone who is nervous about the market.

“There are individuals who are overweight on cash and want to take more risk and conversely there are those with a lot invested in the markets who want to take down their volatility and move funds into an IFISA.” Frazer Fearnhead, founder of The House Crowd, agrees that tackling volatility is as big an issue for investors as getting a decent rate is for cash ISA savers.

“ Stocks and shares ISAs are so volatile”

“Stocks and shares ISAs are so volatile, you can have a good year one year and then have 30 to 40 per cent knocked off the next,” he explains.

“The IFISA provides a more predictable and consistent way to reach your goals.”

The IFISA wrapper is also providing a way for financial advisers to access P2P, which is an area that the sector has typically been wary of due to the lack of Financial Compensation Scheme Protection (FSCS) and a relatively short track record.

“What we sometimes look to do is create portfolios that have a low correlation to equities with the potential returns that keep it above cash and inflation,” explains Max Spurgeon, an adviser for Legal & Medical Investments who recom-

mends the Octopus Choice IFISA. “It typically works for clients with high cash reserves who may have been reticent to invest in recent times.

“We have to be conscious that there is no FSCS cover and there is risk to capital, which is a limiting factor on how much we would put in.

“A platform like Octopus Choice at least has the property as security, which reduces some of the risk, but we wouldn’t be doing this with anybody that feared losing capital.”

David Lumley, an adviser for Arena Wealth, says IFISAs suit clients that are looking for income.

He recommends products offered

by LendInvest, Proplend and Downing to his clients.

“The IFISA can produce a decent yield, albeit with more risk that can be controlled well by investing in loans with security and by diversification across platforms,” he says.

“It typically works with someone

IFISA

who needs to generate income from their portfolio.

“I personally invest in a wider range of P2P platforms to test them

subscribe new money into more than one IFISA per tax year and less flexibility on withdrawing funds with some IFISA products.

out first but I will always let a client meet the people behind them so they can ask any questions.”

There are of course some unique risks to the IFISA that you would not get with cash or shares, such as bad debts, although you could similarly lose money on the stock market.

Moneyfacts’ Springall highlights issues such as not being able to

Handfield-Jones of Octopus Choice points out that it is important to remember that not all IFISAs are the same.

“P2P is just the label,” he says.

“Investors need to consider the underlying asset class.”

Platforms like Octopus Choice and Landbay are offering loans secured on property, which provides extra reassurance that the asset

“ We have to be conscious that there is no FSCS cover [on IFISAs] and there is risk to capital”

13

can be sold to repay bad debts, assuming a decent price and buyer can be found.

Others, such as Zopa and Funding Circle, have unsecured loans in their IFISA but have experienced credit teams and low rates of arrears and defaults.

The IFISA is only into its third tax year. It attracted almost £300m in 2017/2018, but it still has a way to go to catch up with the £39.8bn subscribed in cash ISAs and £28.7bn in stocks and shares over the same period.

But there is clearly an appetite, especially if savings rates remain low and if ongoing macroeconomic uncertainty pushes investors to reduce their exposure to volatile stock markets.

IFISA GUIDE: CONSUMER LOANS This month, we provide details on the consumer loan-focused IFISAs on the market.

LENDING WORKS

RATESETTER

Lending Works’ IFISA, launched in February 2017, advertises an annual return of 6.5 per cent for five-year loans or five per cent for threeyear loans. It is possible to split money across the two rates.

Investors can choose to draw an income or have the repayments automatically re-lent out.

The minimum investment is £10.

Independent research firm 4th Way gives Lending Works’ IFISA its +++ PLUS Rating – its highest rating for IFISAs.

RateSetter’s IFISA invests across consumer, business and property loans, but the majority of the peer-to-peer lender’s portfolio is in consumer loans.

Rates vary depending on supply and demand but as of 10 December investors can earn returns of 5.8 per cent.

Customers can opt to invest in RateSettter’s rolling, one-year and five-year market using the ISA wrapper.

The minimum investment for this flexible ISA is £10.

4th Way gives RateSetter’s IFISA its +++ PLUS Rating.

ZOPA Zopa advertises a rate of 4.5 per cent a year for investors using its ISA Core product, or 5.2 per cent a year for the higher-risk ISA Plus.

It is a flexible ISA, which means money can be withdrawn and then replaced in the same tax year.

The minimum investment is £1,000.

4th Way gives both the Zopa Core and Zopa Plus IFISA products its +++ PLUS Rating.

WELENDUS Welendus launched its IFISA in September 2018.

Investors can fund short-term personal loans via the platform, earning returns between five and 15 per cent.

Welendus is not rated by 4th Way.

Let’s Let’s Make Make 2019 2019

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JOINT VENTURE

15

Digging deep

Asbestos, Japanese knotweed and locality – Kuflink’s senior underwriter Stuart Boag reveals the secrets of a good property valuation

P

ROPERTY valuations are a core part of peer-to-peer lending. The valuation process will dictate whether or not a loan is approved, and how much money can be lent against the asset. A good valuation can even help to inform a prospective lender about the finer details of their investments.

With years of experience in the property lending business, Stuart Boag, senior underwriter at P2P property lender Kuflink, knows exactly what to look for, and what raises alarm bells.

“Japanese knotweed is a major red flag,” says Boag. “Unless it’s being treated correctly, there are minimal lenders out there that will provide lending against it.”

Asbestos is another huge problem for prospective properties. If even a hint of asbestos is found on a site, Kuflink will order a full asbestos report to make sure that there is no risk of contamination.

“Obviously we look at the locality, the demand, and the type of security,” adds Boag. “We will want to know if there’s any planning permission in place, if there’s any potential value for development potential, etc.

“We’ll also look at the comparables to make sure that it is being valued in line with similar properties.”

But this is just the beginning of an incredibly detailed – yet surprisingly speedy – process that will either end in a property loan application being approved or rejected.

Kuflink has partnered with independent valuers and brokers across the country, and they conduct a thorough check on every single property. Boag then reviews their quotes and speaks directly to the valuers to talk through any issues which may have come up.

“ The valuation

process can take four to five times longer at a mainstream bank

”

“One of the valuers we use provides an audit on every valuation,” says Boag. “They have their own panel of valuers who look

at any given property – so it has already had a four-eye check before it lands on my desk.”

In cases where an independent audit has been carried out on a property, Kuflink’s investors will be able to read the report on the listings section of the platform, before they decide to invest.

From the borrower’s perspective, one of the biggest advantages of P2P property lending is that the approval process can be much faster than it would be at a big bank.

Boag knows this better than most – before joining Kuflink, he was a real estate portfolio manager at NatWest.

“In my own experience, the valuation process can take four to five times longer at a mainstream bank,” he says. “Whereas here, as soon as I have the valuation report I can make my recommendation and do a credit paper, then it goes straight to our credit committee and they can say yes or no within a matter of hours.”

Before any property has been valued, it will already have undergone an initial assessment as well as a credit check on the prospective borrower. This initial process will lead to at least 50 per cent of all applications being rejected. After the valuation process has been completed, Boag will usually reject a further 10-15 per cent of these loans.

Given that Kuflink has seen no losses to date, this expert-led process is clearly working.

16

OPEN BANKING

The future of data

One year on from the launch of Open Banking, Danielle Levy investigates the impact of the data-sharing initiative on the peer-to-peer lending industry

O

PEN BANKING launched to great fanfare in January 2018, promising to boost innovation in financial services and improve competition, for the benefit of fintechs and consumers alike.

The initiative, which mirrors the EU’s Revised Payment Services Directive, mandates high street banks to share anonymised customer data with approved third parties (subject to customers providing their approval).

While the project has the potential to create significant growth opportunities for peer-to-peer lenders, things got off to a slow start. When the new regulations were introduced on 13 January 2018, only four out of the UK’s nine largest banks were able to meet the deadline.

Imran Gulamhuseinwala, Open Banking implementation trustee, recently said that the initial Open Banking launch made “a tremendous step forward” but “was not as good as it should have

been” as “the customer journey was not great”.

“It worked but it was a little bit hairy,” he said at the Open Banking Expo in London.

“But actually my work with the government and the banks means that we’re actually going to fix that.

“More than just building technical standards but building customer experience.”

Although business finance aggregator Funding Options was one of the first companies to become

OPEN BANKING

authorised for Open Banking, the management team took the decision to wait until the second half of the year before taking action.

“We knew the technical environment simply wasn’t mature enough, as the APIs (application programming interfaces) were going to brittle, unreliable and

“What we discovered in that period is that the APIs were still pretty immature,” Ford explains.

“I think there needs to be a reality check about this – and I don’t think we should be beating up the banks too much about this as it is a complex and high-risk environment that they are building here.”

“ Pre-Open Banking, it was more difficult or

less secure for a small business to expose itself to other potential lenders unstable,” says Funding Options chief executive Conrad Ford.

“I think a lot of the more grownup start-ups will have taken this approach because it would have taken up a lot of development time with little real commercial benefit.”

However, the company became more serious about exploring the opportunities created by Open Banking during the second half of 2018 after taking part in innovation charity Nesta’s Open Up challenge.

This competition was set up with the backing of the Competition and Markets Authority, offering a £5m prize fund. It aimed to encourage fintech companies to build innovative propositions using Open Banking infrastructure to benefit smaller businesses.

The first phase took place in 2017 and provided companies with access to a sandbox of anonymised small business data. Ford says this provided Funding Options with the opportunity to carry out research and development ahead of the launch.

During phase two of the Open Up Challenge in 2018, they were able to use live APIs.

”

However, the good news is that he believes the situation is rapidly improving. In November 2018, a small business loan was provided via Funding Options using Open Banking data. It is believed to be the first of its kind. A Kent-based beauty salon was able to borrow £10,000 from alternative lender Iwoca in the space of one hour and 23 minutes.

Funding Options uses Open Banking data to fast-track smalland medium-sized enterprise credit approvals. It draws on 40 data points to detect how a small business is performing, as well as the likelihood of a default based on

17

a number of factors. These include current account performance, cash flow and behaviours.

In Ford’s opinion, one of the biggest challenges associated with the initiative is the fact that consumers and small businesses have been told not to share their data for the past few decades, so it will take time to reverse this mindset.

Nevertheless, he believes that Open Banking will ultimately level the playing field between banks and P2P lenders.

“One of the things that is often misreported is the perception that banks are the lumbering dinosaurs that don’t understand technology, and online lenders are very data and technology-driven,” he says. “In reality that is not true as the banks have far more data available than alternative lenders because they see all the bank account data.”

However, this data is now becoming available to P2P platforms through Open Banking.

Ford notes that one of the biggest disadvantages associated with banks is that they take a one-size-fits-all approach with smaller businesses.

Over time, he hopes that P2P lenders will be able to draw on data to provide more tailored solutions to different small business segments.

18

OPEN BANKING

“ It will be a

game-changing technology for the lending sector

”

“I expect to see the emergence of specialist lenders which can out-lend the banks for particular segments and circumstances,” he adds.

Chris Gorst, challenge prize lead at Nesta, notes that Open Banking data can provide P2P lenders with real-time, authoritative information on the borrower, which means they can make better and quicker lending decisions.

“They are no longer relying on what might be quite old credit reference agency data or scanned

and uploaded copies of bank transactions,” he says.

With time, he suspects that P2P platforms will start to prise business away from banks, which were historically approached by their small business customers for loans purely because of their existing relationship as their current account provider.

“Pre-Open Banking, it was more difficult or less secure for a small business to expose itself to other potential lenders,” Gorst

explains. “The opportunity in place for P2P lenders is to deepen that relationship with their small business customers, so it is not just transactional.”

By this, he means that a P2P lender will be able to use a small business’s data and wider data to help them to predict what is coming up. This could involve foreseeing any cash flow challenges or to think about future financing needs in advance to ensure the company gets the best possible deal.

OPEN BANKING

enhance a P2P lender’s due diligence process.

“The current process involves manual input of accounts and bank statements. It is very cumbersome and takes time, whereas the ability to have that vast amount of banking data allows you to perform better credit decisions,” he explains.

He says another benefit associated

actions to help them keep track of and manage their money more effectively,” Baclin says.

The P2P lender believes that the key to capitalising on the opportunities presented by Open Banking will come down to helping consumers to understand the value of sharing their data.

Following a slow start for the

“ Banks have far more data available than alternative lenders ”

“It is about really helping the small business to manage their whole financial lives,” Gorst says.

He adds that P2P lenders can strengthen their relationships with businesses by providing ancillary services outside of core lending. This could include foreign exchange, accounting assistance or invoice discounting.

Chris Hancock, chief executive of Crowd2Fund, agrees that Open Banking data can significantly

with the initiative is that it can reduce transfer fees as well as the time taken to complete transfers because Open Banking can be used to automatically transfer money from one bank account to another.

This could prove particularly helpful for consumers and P2P investors.

Zopa took the decision to plug into Open Banking shortly after the initiative’s launch and it is already reaping the benefits. It launched its income verification tool when Open Banking was unveiled last January.

“Over half of people who need to verify their income to take out a loan with us choose to do so by connecting their bank account, and allowing us to access their transaction information automatically,” explains Didier Baclin, chief innovation officer at Zopa.

“This enables us to offer a more streamlined application process and a speedier service for customers.”

Zopa has also developed a money management app powered by Open Banking, as part of its bank launch.

This new app allows individuals to stay on top of their finances by aggregating their bank accounts from different providers.

“This tool will provide customers with powerful data-led insights and

19

Open Banking initiative, what is likely to lie ahead?

Hancock expects to see the emergence of a new generation of challenger banks.

“I think there is going to be a new wave of challenger banks which don’t have to spend millions on regulatory fees because they can essentially use Open Banking to provide enhanced capabilities,” he adds.

Meanwhile, Gorst hopes to see more of a marketplace structure emerging in retail banking – where consumers can easily identify the best providers for the services they require.

“Rather than having everything packaged up with one provider, they can find the right product across the whole market,” he predicts.

One thing that is for sure is that the alternative finance industry must start to explore the potential opportunities created by Open Banking – before it is too late.

“There is no doubt that once Open Banking is common and endemic it will be a game-changing technology for the lending sector,” says Ford. “We absolutely intend to be a part of it and if we aren’t we will get left behind.”

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JOINT VENTURE

21

Calling all entrepreneurs Amid a major fundraising effort, Chris Hancock, chief executive of Crowd2Fund, explains why his platform is for entrepreneurs, funded by entrepreneurs

I

NNOVATION SEEMS to follow Crowd2Fund. It was one of the first peer-to-peer lending platforms to gain Innovative Finance ISA manager status, and it is arguably one of the ‘purest’ P2P platforms on the market today. Unlike most of its competitors, Crowd2Fund does not offer pooled returns to its investors.

Instead, investors can hand pick each and every loan that they want to invest in, earning average annual returns of 10.46 per cent, before fees and bad debt – tax free.

This commitment to total transparency and competitive rates has won the platform legions of fans. In fact, by the end of 2018, Crowd2Fund had recorded a massive 317 per cent in annual growth, bringing its current valuation to £35m.

And chief executive Chris Hancock has big plans to increase the company’s value even more dramatically in the year ahead.

“We’re looking to lend more than £30m over the next twelve months which will bring our company valuation up to almost £70m,” says Hancock. “By 2022, we are targeting £3bn in lending, generating £180m in revenue.”

To kick start this growth, Crowd2Fund is releasing £2m of shares for private investors. For the first time, these shares are being offered to non-Crowd2Fund users, as the platform hopes to grow its private ownership base from 121

high-net-worth individuals to 450.

Given the company’s strong growth over the past two years, Hancock has forecast a 10x – 20x return for private shareholders within the next five to 10 years. Any funds invested will also be eligible for 30 per cent tax relief under the Enterprise Investment Scheme.

“What makes us different from an incumbent platform or a bank is that we give the investors ultimate control of their money because they select loans based on their own due diligence,” says Hancock.

“Other platforms don't offer that.

We are part of a new wave of highly innovative platforms that can offer more innovation, more technology,

and a better user experience.”

Crowd2Fund will soon launch a slew of new features that underline its commitment to innovation. In the second quarter of this year, an optin ‘contingency fund’ will be introduced, allowing investors to effectively pool their losses to minimise risk. The platform also intends to open up the recoveries process to investors, as part of its efforts to make the lending experience as transparent as possible.

According to Hancock, investors will be able to take a more active role in the recovery process by monitoring payments and payment reminders, and voting on how to manage a distressed loan. This is the level of control and transparency that his business-focused investor base wants to see in a P2P platform, Hancock says.

“We are the platform for entrepreneurs,” he adds. “We are funded by entrepreneurs, and we are for entrepreneurs - whether you're an investor entrepreneur or a business owner you're by default an entrepreneur.”

As the platform races towards its next milestone, it seems the entrepreneurs have already taken notice.

Find out more about the Crowd2Fund platform and download the in-depth whitepaper at investment.crowd2fund.com.

22

PROFILE

Fairer funding

Katrin Herrling co-founded Funding Xchange in order to help small businesses access the myriad of finance options available to them. She talks to Andrew Saunders about her own experience with bank funding, the importance of tech and what the future looks like for business finance

T

HE FINTECH SECTOR may be no stranger to refugees from banking or consulting seeking a better way to do business, but ex-dairy farmers are rather less frequently encountered in the fashionable workspaces of Shoreditch.

In fact, FundingXchange chief executive and co-founder Katrin Herrling has been both consultant and dairy farmer at the same time.

Before she started the small- and medium-sized enterprise (SME) finance comparison site, she spent seven years with management consulting giant Bain providing strategic advice to the senior leaders of major banks across Europe, whilst also helping to run the family business, a dairy farm in Ireland’s County Wexford.

But for all her financial expertise, it was a formative experience as an SME customer at the hands of a big bank that inspired her to start FundingXchange. In 2010, shortly after the financial crisis, she recalls having a meeting with the farm’s bank. Despite the business having been a customer for decades and having been an excellent risk over that time, it was not a happy encounter.

“I was sitting in front of a banker who told me that the terms we had been accessing as a business

customer for over 20 years were just going to disappear, and that from now on my cost of credit was going to be three times as much as it had been,” Herrling explains.

“Nothing had changed on my side, only on the bank’s. I walked out of that meeting thinking that

even though I had worked with all the major commercial banks in Europe, I had no idea who was going to fund my business. I was also thinking that if someone like me had no idea where to turn, that suggested a real problem.”

One person’s problem is another’s

PROFILE

opportunity of course, and so the idea for FundingXchange came about – a one stop shop where small business owners can find quick, jargon-free and accurate advice on all the funding options available to them, just as consumers can compare mortgages, credit cards and insurance bank accounts, online and in moments.

“Look at what has happened in consumer finance – you can compare and access the product you want almost instantly,” she says. “Why doesn’t that work in the SME world? It’s because SMEs are more complex to understand than consumers.”

It's a fair point: a sole trader turning over £50,000 with a few dozen local customers is a very different kind of risk to a firm with sales of £20m, 50 employees and customers all over the world – but they are both SMEs. Historically that heterogeneity has made it hard for lenders to assess large numbers of individual businesses

“

We are sensing a shift when it comes to borrowing

”

and has led to situations such as that experienced by Herrling, where entire sectors are effectively treated as the same, usually high, risk.

“Friction is widespread in the system, and it comes from the lack of visibility around the performance of a business,” she asserts. “If you want to reduce the friction it’s all about having access to live validated data that tells me how a business is doing.”

That’s the essence of the deal that FundingXchange offers its customers, she says. “In return for providing access to that data, we provide them with offers from lenders, and give them control over which lenders they choose to work with.

“We’re entirely impartial as to

23

which lender a customer uses. We have exactly the same terms with all of them,” she adds. “We just care about having accurate information from our lenders as to who they want to fund, what terms they can provide and how quickly they can help businesses.”

In the early days, Herrling and her co-founder Olivier Beau de Lomenie – the man behind Ocado’s e-commerce platform – made plenty of mistakes, one of which in particular turned out to be a vital insight in disguise.

“We started off giving product advice but we soon figured out that business owners don’t think like this,” Herrling recounts. “They don’t understand the difference between asset finance and invoice finance, or what a credit line is.”

That’s because, she says, in the sub-£2m turnover market where most of their customers are found, businesses don’t have a dedicated finance person. The owner does it, and owners may be passionate

24

PROFILE

about many things – employees, customers and products – but they are not usually finance experts.

“Finance is what happens after eight o’clock at night,” Herrling comments. “The way a business owner thinks about it is ‘I need money, I need this amount for this long’ and usually they need it quite quickly.”

So, they dropped all the product jargon and instead simply presented customers with all the available funding options in one place. It was harder to do, but it was what the customer wanted.

“You don’t care how the deals are packaged, you just want to know how much money you can borrow and on what terms,” Herrling explains.

The other thing that the customer wants is certainty – or as near to it as can be managed. Gaining provisional acceptance only to be rejected further down the line by a chosen lender is a big issue for comparison sites generally and SME ones in particular. Herrling explains that they have been working hard on their ‘match rate’ ever since the business got going in 2015.

“We measure how many of the

possible the decision-making processes of FundingXchange’s 45-plus lending partners. These range from traditional banks like NatWest, Lloyd’s and Alllied Irish Bank, through to challenger banks like Metro and fintechs including

“ I believe that small businesses will engage with their finances largely through cloud accounting solutions

customers we introduce actually get funded each month, and every time we try to improve the ratio,” she says. “It’s what our customers expect and it’s why we have made a huge investment in technology.”

Key to that tech is a platform that can reflect as closely as

”

MarketInvoice and Iwoca. They all have different lending profiles, products and target customers to be factored in.

“What we have cracked is the ability to hold enough of the underwriting models of our lenders to be able to give our customers

personalised terms,” she says. “Noone else has done that.”

It wasn’t easy to persuade lenders to part with such vital commercial information as their underwriting processes, she admits, but once they started to see the results coming through lenders became more trusting. “Now we have several lenders that provide their decisioning completely within our platform, so you have certainty that you will be funded,” she adds.

The result of this combination of tech focus and strong partner relations, claims Herrling, is a classleading performance. “We know from our lenders that where we have optimised for them, our close rate is four times higher than that of our nearest competitor,” she says.

“It doesn’t necessarily work as well with larger deals but it does for

PROFILE

volume lenders who have a rigorous understanding of their risk appetite.”

As well as lenders, the business also partners with commercial and government bodies to help it find more customers. Key commercial partners include MoneySuperMarket, for whom FundingXchange provides price comparisons for SME customers.

Another major commercial partner is Sage – FundingXchange is integrated into Sage’s popular SME accounting software and this is an area of the market that Herrling expects will only become more important as technology takes off.

“In the near future I believe that small businesses will engage with their finances largely through cloud accounting solutions,” she predicts.

“So we are a price comparison site at the moment but we will be

migrating over time to get closer and closer to helping businesses manage their finances.”

The provision of these so-called intelligent financing products and services will depend on the much-discussed developments in Open Banking. Open Banking will allow SMEs to grant secure thirdparty access to their bank account records, enabling – in theory anyway – a whole raft of new AIpowered, mobile-friendly financial services for entrepreneurs.

Many eager fintechs have expressed disappointment with the rate of progress in Open Banking legislation, but Herrling – who knows from her time as a consultant how slow banks can be to change – thinks otherwise. “It’s a critical infrastructure piece and the fact that the UK has made it happen in the time it has done is beyond astonishing,” she says. “It’s easy to criticise but the reality is that the speed with which Open Banking was delivered is like overnight.”

On the government side, FundingXchange is one of three platforms – the others being Funding Options and Alternative Business Funding – designated by the British Business Bank to take part in the Bank Referral Scheme.

Every SME turned down by a regular bank is referred to the designated platforms, and 902 loans worth a total of £15.6m have been funded between the scheme’s inception in 2016 and the second quarter of 2018. This equates to a conversion rate of about 10 per cent of referred SMEs which applied for an alternative quote.

Those figures may be fairly modest, but each loan is a business funded that would not have been otherwise. The scheme is working better for FundingXchange than for

25

the other platforms, says Herrling.

“We have done 50 per cent of the closures [for the total scheme] over the last year, it’s as simple as that,” she claims.

Taking a broader view of how the sector might develop in 2019 and beyond, she has concerns that some smaller niche lenders might be pushed out by the scale of the biggest alt-fi beasts. “I think the scale and automation of the market could be of detriment to smaller, more innovative lenders,” she says.

“We are seeing the emergence of a small number of very well-funded players, that can buy market share even if their products are not the best available.

“That’s why we charge the same commission to all our lenders – I don’t think it’s the right thing to give customers only to those businesses who can pay the most for them.”

Although she carefully avoids making any definitive predictions, it’s also pretty clear that she is expecting the UK economy to take a turn for the worse sometime soon. “We are sensing a shift when it comes to borrowing,” she states.

“There has been less appetite to invest for growth over the last three months, while defensive borrowing – borrowing to shore up the business – is on the increase.”

But if another downturn is on the way she believes that the diverse range of alternative lenders – and peer-to-peer platforms in particular – will help to keep the vital supply of business credit flowing, should bank lending dry up again.

“It’s what we saw in the last downturn and the response from P2P was highly effective,” she comments. “Having P2P as one of a range of safety valves is definitely not a bad thing.”

DIRECTORY

INVESTMENT PLATFORMS

27

XXXXXXXXXX

The BridgeCrowd is a well-established bridging lender that offers two simple products: a low-rate facility, catering for straightforward cases, and an exclusive ‘valuation only’ product which provides a solution for hard-to-place bridges, e.g. severe, adverse credit or no exit. In short, if something has a value, the BridgeCrowd can lend against it. www.thebridgecrowd.com T: 0161 312 56 56 E: borrowers@thebridgecrowd.com E: investors@thebridgecrowd.com Downing designs products that help investors look after their financial wellbeing, while its investment partnerships support businesses in their ambitions. Its crowdfunding platform, Downing Crowd, allows people to lend directly to small UK businesses, typically through bonds offering returns from three to eight per cent per year. www.downingcrowd.co.uk T: 020 7416 7780 E: crowdfunding@downing.co.uk MoneyThing is a peer-to-business lending platform that offers better deals to lenders and borrowers. It offers individuals great returns on IFISA-eligible investments backed by property or business assets. MoneyThing’s investors have helped businesses across the UK to buy property or fund growth. The platform is FCA regulated and committed to responsible lending. www.moneything.com T: 08000 663344 E: support@moneything.com Wellesley is an established property investment platform, that issues bond investments to the UK retail market. Its core objective is to provide investors with higher rates of return than can be accessed through traditional investment routes, whilst simultaneously providing financing to experienced commercial borrowers within the UK residential property market. www.wellesley.co.uk T: 0800 888 6001 E: info@wellesley.co.uk SERVICE PROVIDERS

Fox Williams is a City law firm with a specialist fintech legal team. Fox Williams delivers commercially-focused and up-to-date fintech legal and regulatory advice on various business models. A key focus area includes P2P lending and it acts for several of the largest P2P lending platforms. www.foxwilliams.com T: 020 7628 2000 E: jsegal@foxwilliams.com

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