Peer2Peer Finance News August 2022 by Alternative Credit Investor

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INVESTING FOR RETIREMENT

How a pensioner is using P2P

NEW INNOVATIONS

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Open banking set to change the sector this year

The Money Platform’s George Huntley is passionate about financial inclusion

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ISSUE 72 | AUGUST 2022

Opportunity for P2P as banks cool on lending PEER-TO-PEER lending platforms have an opportunity to attract new borrowers as high street banks tighten their lending. Recent data has shown that banks are becoming more cautious with mortgage lending, business lending and consumer lending, due to the pressures of inflation and rising interest rates. This means that many consumer and business borrowers will be unable to receive financing from traditional lenders in the months ahead. However, several P2P stakeholders have pointed out that P2P lending platforms have spent the pandemic fine-tuning their processes, and are now able to ramp up their operations in anticipation of higher borrower demand. “The overall market has a lot of room to grow, even without banks tightening now,” said Neil Faulkner, managing director of P2P ratings site 4th Way. “I expect this will just help P2P lenders to

win market share more quickly. Platforms on the whole have remained especially disciplined since the pandemic, so there's really no need for them to tighten further themselves.” Rob Pasco, chief executive of Plend, said that since his consumer lending platform launched in beta mode in mid-May, he has seen a lot of people turn to P2P after being turned down for a bank loan. “We’ve seen a lot of people say ‘thanks for giving me a loan at 12 per cent because my bank wouldn’t give me one’,” he said. “That’s been quite a

common use case. We’re very close to one bank in particular and they have tightened their policies. No one is increasing lending.” “Banks are tightening their lending in response to the cost-of-living crisis and squeezed affordability,” added George Huntley, chief executive of The Money Platform. “However, P2P lenders have proven themselves to be nimble, using new tools like open banking to boost lending in underserved areas and stealing a march on the banks for good quality customers left behind by traditional finance. I

think data-savvy fintech players will continue to grow, even in these challenging times.” According to the latest Bank of England statistics, banks reported a decrease in the availability of secured credit to households in the three months ending 31 May 2022, alongside rising default rates. The availability of secured credit is expected to fall again during the third quarter of this year. Meanwhile, the availability of unsecured credit to households increased slightly in the second quarter of the year, but is expected >> 4

Peer2Peer Finance News is hosting its inaugural awards event – the Peer2Peer Finance Awards – on Tuesday 6 December 2022 at the prestigious Hurlingham Club in London. The awards will highlight the best and brightest among the peer-to-peer lending industry, including platforms and the service providers supporting them. Nominations close on 31 August so make sure to apply now! For more information on awards categories and table sales, please email Peer2Peer Finance News’ sales and marketing manager Tehmeena Khan at tehmeena@p2pfinancenews.co.uk.

EDITOR’S LETTER

Published by Royal Crescent Publishing

Green Park House, 15 Stratton St, Mayfair, London W1J 8LQ info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk PRODUCTION Tim Parker Art Director COMMERCIAL Tehmeena Khan Sales and Marketing Manager tehmeena@p2pfinancenews.co.uk SUBSCRIPTIONS AND DISTRIBUTION tehmeena@p2pfinancenews.co.uk Find our website at www.p2pfinancenews.co.uk 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.

n this month’s editor’s letter, I’m pleased to talk about the inaugural Peer2Peer Finance Awards – the first time the peerto-peer lending industry will have a dedicated awards event. Peer2Peer Finance News had planned to hold its first awards in 2020, but with the pandemic putting real-life events on pause – and causing mass uncertainty across all sectors – we felt it was best to wait. This is the first year post-pandemic that the appetite for events seems to have truly returned, and I’m excited that we’ll be celebrating the P2P lending industry’s achievements on Tuesday 6 December at London’s Hurlingham Club. Of course, an awards event is more than an excuse for a party, as it is also an opportunity to recognise the companies and individuals that have made the industry a success. We have a wide array of categories, including P2P firm of the year, innovative lender of the year, open banking provider of the year and business advisory firm of the year, to acknowledge the best platforms and the service providers that support them. Nominations are open until 31 August, so if you would like to nominate yourself or others, please go to the ‘Awards’ section of our website for more information or email P2PFN’s sales and marketing manager Tehmeena Khan at tehmeena@p2pfinancenews.co.uk. And good luck!

SUZIE NEUWIRTH EDITOR-IN-CHIEF

We hope you’re enjoying the latest edition of Peer2Peer Finance News! We have now moved to a paid-for subscription model. If you would like to continue reading the magazine, please go to www.p2pfinancenews. co.uk/subscribe/ to find out about subscription options.

NEWS

cont. from page 1 to fall by the end of the summer. This has led some economists to warn of a looming credit crisis, echoing the 2007/2008 global financial crisis which fuelled the growth of P2P lending. “P2P was born out of the global financial crisis and we continue to seek out investment opportunities for our investors at times when banks have difficulty doing so,” said Stuart Law, chief executive of Assetz Capital.

“This is primarily due to the leverage that banks use versus the unleveraged position typically used in P2P lending.” Ever since the global financial crisis, banks have been subject to capital adequacy requirements which ensure that they are not lending irresponsibly. While P2P lenders are not subject to these requirements, their strict credit assessment processes are designed to ensure that only the most creditworthy borrowers receive lender funds.

“Responsible lending is paramount here,” said Rishi Zaveri, chief executive of Lendwise. “The cost-of-living crisis, inflation and interest rate rises means that everyone has less money available to service their debt. Therefore, some tightening of lending may be the right thing to do with an ever-increasing focus on affordability. “On the other hand, invariably the tightening means that they will cut back on lending, which has been a direction of travel

for traditional banks for some time now, which originally gave rise to P2P players, so there is an opportunity for P2P consumer lenders to increase lending in a socially responsible manner.” “P2P lenders can capitalise now that risk pricing is normalising,” adds Daniel Rajkumar, founder and managing director of Rebuildingsociety. “We just need to be smart about which industries stand to prosper most during this phase of the economic cycle.”

Plend lends £0.5m since launching in May NEW peer-to-peer lending platform Plend has delivered more than £500,000 in consumer loans since launching in beta mode in mid-May. The beta stage was initially set to last for six months, but due to higher-than-expected demand from borrowers, the platform ended it early and opened the platform to the public at the beginning of July instead. Since mid-May, the platform has processed more than £7.2m in loan requests, with only prime borrowers being approved. Rob Pasco, chief executive and co-founder of Plend, said that the platform is aiming to have

lent out £14m by the end of 2022. “Its been amazing, but also mad,” Pasco said. “The hardest thing for us has been dealing with so many applications. A lot of people are looking to get low-cost credit at the moment. “The next big challenge for us is how we ramp this up further. We have

a target of £14m by the end of this year. Our next objective is to scale up so we can process more loans.” At present, Plend’s loans are funded by a mix of sophisticated, experienced and high-net-worth investors, as well as a family office. Pasco hopes to open the platform more generally to all retail

investors next year. Once this happens, Pasco said Plend may choose to launch its own Innovative Finance ISA. “Our focus is getting the borrowing capability scaled so we can reach our £14m target,” he said. “Next year possibly we’ll look at opening up the general lending side.” Plend became regulated by the Financial Conduct Authority in April 2022, after a two-year approval process. Its average borrower rate is just under 14 per cent, while investor rates vary. The platform is expected to announce a new institutional backer soon.

PERSONAL FINANCE NEWS

“I can’t think of a better investment” A PENSIONER has revealed how he is comfortable relying on peer-to-peer lending to fund his retirement needs. David Symonds (pictured), 81, had a varied career running electrical shops and household furnishing businesses as well as a property development partnership and was looking for somewhere to invest with decent interest rates a few years ago. He keeps money aside – along with his state pension – that he and his wife can use but has invested £450,000 through P2P lending platforms including ArchOver and Kuflink. “I used to have shares and made good profits but I was looking for better interest,” he said. “Interest rates were very poor six or seven years ago so I went online to look at various P2P lending companies. “The stock market has no security. “A platform like Kuflink ticks all the boxes as you have decent interest rates, an underlying security and a secondary market if you want to sell your loans, plus the customer service is pretty good. “It is less risky as it is investing in property and is a tangible asset that you don’t get with stocks and shares.”

Symonds said he is aware of the risks of P2P lending and has narrowed his preferred platforms down over the years, having invested small amounts in others including Crowdstacker and nowclosed platforms Lending Works and RateSetter. He added that he has made some losses from other platforms but has

begun diverting funds to Kuflink. Symonds has earned returns of six to 6.8 per cent and plans to use the money for his old age, for example if he and his wife need to go into care homes. “I do my homework and look at the surveyor’s report and try to get as low a loan-to-value as possible,” he said.

“It is also useful that Kuflink puts money into the loans itself. “If there is a market crash, which is possible, I always look at the lending criteria to make sure it is suitable. “I can’t think of a better investment as the security is there, while with stocks and shares you can’t do much if everything goes south.”

NEWS

The truth behind P2P default data PEER-TO-PEER lending platforms publish plenty of loan performance statistics but two of the most significant are anticipated and actual loan arrears – and here is why it matters to investors. As with any investment, historical performance is not a guarantee of future returns but it can give an indication of how a P2P loanbook is structured and managed in terms of the level of risk and recovery. This helps an investor assess risk by seeing how likely loans are to collapse as well as how good platforms are at recovering bad debts. Some platforms will publish anticipated arrears

figures, which gives an idea of the percentage of loans in a given year that could default or fall into arrears. Many use the Financial Conduct Authority’s (FCA’s) default definition, which is when a loan is more than 180 days past its contractual payment date. But it is also important to check what a platform’s actual default rate is. This figure is often lower as a lender may manage to recover funds, or loans may perform better than expected. For example, the largest P2P lender Assetz Capital’s probability of default rate for loans in 2019 and 2020 was 7.7 per cent and 6.2 per cent respectively.

But its actual loss rate for these loans is currently zero. Similarly, Kuflink displays a default rate for loans under each risk rating as well as a blended figure. Its blended default rate for 2021 was 6.67 per cent but the platform said investors have not lost any funds as a result of bad loans. Unlike the FCA’s definition, Kuflink defines a default once a loan is one month late. “It is better to get in and out as quick as you can when the clouds turn grey, there is no special formula but it is dependent on each lender’s processes and

staff and their experience in collecting loans and presenting defaults,” Narinder Khattoare, chief executive of Kuflink, said. Judith Tan, head of capital markets at Estateguru, said the key to reducing arrears is strong loanbook management and having conservative individuals in its risk departments across all its locations. “It allows lenders to pick up on borrower behaviour and spot the warning signs sooner, so that they can reach out to relevant individuals at an earlier stage to ensure any potential delinquencies are addressed before entering litigation or auctioning of the asset,” she said.

Up to £10m of IFISA money hits the market UP TO £10m of Innovative Finance ISA (IFISA) money is up for grabs, as peer-to-peer lending platform Ablrate exits the market. The asset-backed lender announced last month that it was winding down its platform, blaming the economic outlook, challenges with its loanbook and the regulatory trajectory. Chief executive David Bradley-Ward told Peer2Peer Finance News that its IFISA wrapper held around £8m to £10m

at the time that the winddown was announced. This creates an opportunity for other platforms to attract new investors seeking tax-free earnings on their P2P loans. Narinder Khattoare, chief executive of Kuflink, said his platform

would “absolutely” be a good home for Ablrate’s IFISA money. “We’re always open to taking money from other providers,” he added. Ablrate said last month that investors wishing to withdraw any cash balance from

an IFISA account to their designated bank account should follow the normal withdrawal process, although it highlighted that this would result in the loss of the tax-free wrapper. To maintain the ISA wrapper, cash can be transferred out to a new ISA provider. Ablrate will waive its standard fee and cover the cost of the first transfer out from investors’ IFISA accounts in each financial year, and thereafter its usual charge will apply.

JOINT VENTURE

How Folk2Folk is fighting rural discrimination

URAL BUSINESS OWNERS are being left behind, despite the government’s highprofile ‘levelling-up’ campaign. However, marketplace lending platform Folk2Folk has been fighting back by addressing the significant funding gap that faces small- and medium-sized enterprises (SMEs) based outside of London and other large conurbations. Yet challenges remain. Roy Warren, managing director of Folk2Folk, says that despite the staycation boom, the race for space and the need to level up, most banks and alternative funders still don’t fully understand the needs and values of rural businesses. “In effect, rural businesses are discriminated against compared to their urban counterparts,” he says. “Simply put there are invisible barriers to finance for small businesses in the regions. I think the UK can have a rural renaissance but first we need to level the playing field. “Our answer to this is to fund it ourselves, by incentivising investment and creating a circular economy.” That is exactly what Folk2Folk has been doing since the company was founded in a small market town in Cornwall in 2013. Since then, the brand has grown nationally to deliver more than £500m of investment into regional small businesses since inception. Folk2Folk was founded during a time when the nation was still reeling from the global financial crisis, banks were withdrawing from many rural areas, funding for businesses was drying up, and

savers were receiving rock-bottom levels of interest. “Early on we realised this problem wasn’t limited to the rural communities and economies of Cornwall but was an issue for rural regions nationally,” says Warren. “For nine years now, Folk2Folk has been working to facilitate the flow of capital into the rural regions of the UK; ensuring our countryside is a viable place to live and work and has the same opportunities to access finance as its urban counterparts. “More recently, the plight of these underserved markets within our regions has been highlighted nationally by the levelling up agenda, and as a result more funders are following Folk2Folk’s lead and looking beyond London.” A recent analysis by Peer2Peer Finance News of 36H Group data found that the three largest P2P

lenders in the UK are now all based outside of London, emphasising the huge opportunities for lenders and borrowers beyond the capital city. “As a rural business ourselves, we are the living embodiment of the change we are trying to affect,” adds Warren. “We are a funding and investment mechanism that enables folks to live and work in the regional areas of the UK. The injection of investment into rural businesses and local economies creates jobs and opportunities, stemming the tide of talent and money that traditionally floods out to the cities.” Although Folk2Folk is based in Cornwall, it is very much a UK business, with staff located in regional areas across the country. Warren says that geographical diversity is very important to the business, and he is committed to supporting all regions of the UK. “Folk2Folk’s purpose is to help create and sustain financially and socially successful local and regional economies,” he says. “The transactions between our borrowers and investors have an impact that is felt far beyond their relationship via our online platform. A happy by-product of our lending is a form of trickledown economics which often has a wider human benefit which we call FolkonomicsTM. “By accessing secured business loans for growth, development and diversification, our borrowers may often benefit their local economy and community. In most instances they are creating and sustaining jobs; retaining talent in the nonurban areas of regional Britain, and stemming its tide to the cities.”

OPEN BANKING

How will open banking impact P2P lending this year?

PEN BANKING HAS been hailed as the solution to small and medium-sized enterprise (SME) funding and consumer lending. More than six million Brits are already using the data-sharing technology to help them find

better deals, and this figure is rising by the day. A recent survey by TransUnion found that younger people have responded particularly strongly to open banking solutions. 42 per cent of Gen Z consumers already use open banking, while

a further 32 per cent said they haven’t used it yet but would be willing to do so. Meanwhile, separate research from identity management company Curity found that almost half (43 per cent) of all large financial institutions have now adopted open banking, and 71 per cent of financial institutions plan to adopt open banking in the next 18 months. Yet there has been some hesitation among peer-to-peer lending platforms. Concerns abide around the efficacy and affordability of cyber security and data protection. For some platforms, the benefits of open banking do not yet outweigh the risks. For others, it represents an opportunity to improve their underwriting skills and attract new borrowers. We asked a number of P2P platforms how important open banking will be to their business over the next 12 months, to get a sense of uptake over the coming year, and some of the responses were a little surprising. Read on to learn more about how open banking is set to change the P2P sector in the year ahead…

How important will open banking be to your business in the next 12 months? Filip Karadaghi co-founder and chief executive of LandlordInvest “It is not important at all given the type of lending that we do. “We retain interest on most loans therefore an overview of borrowers’ real-time transactions or financial standing is not overly useful. “Secondly, loan documents for secured loans usually contain no provisions in relation to data made available through open banking and we would be limited or unable to act on the information. “And finally, when the borrower is a special purpose vehicle, open banking provides little insight. Furthermore, there may be shareholders or guarantors where open banking provision may not be possible and breach data protection rules. We have no affordability rules and it's therefore questionable from data protection laws.”

OPEN BANKING

Ali Celiker chief executive, British Pearl "Interoperability is a logical and inevitable evolution of the financial system. Open banking offers efficiencies and user experience improvements which benefit all stakeholders. “British Pearl embraced open banking early on. It was the first real estate investment platform to develop an open API in 2019. We continue to be committed to using the latest suitable technologies to simplify the value chain and bring to a wider audience previously hard to access real estate investments."

Paul Sonabend executive chairman, Relendex “We are building our platform software to accommodate the future implementation of open banking links but given the gating of most retail investors we cannot see any benefits in the near term. “Certainly, no plans for the next 12 months.”

Brian Bartaby founder and chief executive of Proplend “Open banking is all good on paper but will only be truly transformational for the likes of Proplend when the 90-day token consent limit is revised. “You cannot expect a client to refresh their credentials every 90 days for a five-year loan.”

Pat Farr chief technology officer, Abundance Investment "After a slow start we are really seeing the value of open banking materialise through its ecosystem of specialist providers, allowing platforms to unlock operational efficiencies and product benefits at a low cost of integration. “It has moved from a 'nice to have' to a ‘must have’ on our roadmap, as more and more customers demand a fast and frictionless experience when managing their money across platforms."

OPEN BANKING

Rob Pasco co-founder and chief executive, Plend "Open banking is ingrained into all our core processes, including credit risk, payments, fraud and anti money laundering, so it is vital to our next 12 months of growth.”

Daniel Rajkumar chief executive, Rebuildingsociety “Open banking is pivotal to delivering more efficient financial services. “We’re using it to clear transactions efficiently ensuring lenders can extract their profits quickly.”

Narinder Khattoare chief executive, Kuflink “Open banking will very crucial to our business over the next 12 months, as part of our underwriting process and within our credit committees, to help us make the correct decisions on lending to borrowers. “As our products increase so does our liability and risk. It is crucial we see the full extent of the borrowers' incomings and outgoings. Far too often when asking for current account statements, borrowers will only give a copy of whichever account of theirs looks the most appropriate to be viewed by a lender. “Open banking allows lenders to make commercial decisions when lending. You will be able to see the total outgoings and other borrowings which may not come to light during an application process. “Later this year, we will launch a product where this will be incorporated into our systems so our underwriters will have realtime access at their disposal when underwriting deals.”

OPEN BANKING

Lee Birkett chief executive and founder, JustUs “Open banking has been one of our everyday underwriting tools at JustUs and its development is improving all the time. “I can’t see any negatives with open banking, only positives, and better UX for those clients happy to share their data. “Web3, whereby people will own their own personal financial data and their own full reserve digital currencies, puts the fear of God into heritage fractional reserve banks as they will no longer be needed.”

Nicola Horlick chief executive, Money&Co “We will definitely be making use of open banking in the future. We are planning to launch an app which will use it. However, it will probably take more than 12 months for us to design and launch the app.”

Stuart Law chief executive, Assetz Capital “Open banking will have importance to us over the next year in our overall plans to improve productivity and the customer journey.”

Rishi Zaveri chief executive, Lendwise “As a platform with a focus on inclusive lending, open banking is a key pillar to this approach. “In my opinion, what is important to monitor is the increasing rate at which it is being embraced by individuals as part of a loan application process and it is the responsibility of the big banks to enable greater access to make the technology behind open banking more seamless and efficient.”

JOINT VENTURE

Kuflink aims to reach £300m by June 2023

UFLINK IS ON COURSE to reach its £300m lending milestone by June 2023 – just a year after it hit the £200m mark. It took the peer-to-peer lending platform almost five years to reach its £100m lending milestone, and another 17 months to reach £200m, demonstrating the pace of growth at the firm. However, for Narinder Khattoare, chief executive of Kuflink, the milestones haven’t been coming quickly enough. “From a business perspective, I don’t think the £200m milestone was hit as quickly as it should have been,” he said. “We’ve had to get through the Covid and lockdown period which was a struggle for most businesses but a blessing for some, as it allowed them to streamline their business and reset for them to achieve a different goal. “We were able to get into development loans before the hike in costs for builds, as many were sitting on materials which were bought at a good price before everything went through the roof.” Since the start of the year, Kuflink has been in high-growth mode, working on a raft of innovative new products and services, as well as expanding its team. “With the number of products we have and will bring to market, we should probably reach £300m before next June,” says Khattoare. “We have grown our team with a few senior hires which we will announce in due course to get the Kuflink brand even more prominent amongst the intermediary community.”

At the moment, Kuflink’s investors are particularly interested in the platform’s mezzanine loans. These are offered with a higher loanto-value of 80-85 per cent, with a premium that is passed on to the investor. These mezzanine loans always sit behind Kuflink’s own senior loan, which means that the platform can maintain control. More recently, Kuflink has introduced a suite of buy-to-let (BTL) products which have been popular with borrowers. “We are starting to get more enquiries in but we will only do the loans which we feel are right for us and our investors,” Khattoare said. “At present it is too early to comment on what our investors see as a good product or not. “Investors have been earning good rates from us, although some would say not high enough. We believe these rates are realistic in the current climate. We’ve never been able to pass on double digits to our investors as we don’t earn

as big a margin as other platforms. This is because our focus is on less risky projects, meaning the rate of interest we charge is competitive so that is reflected in our offering.” Investors in the platform’s BTL products are currently earning between 2.5 and three per cent, depending on the risk profile of the borrower. “This will be an educational process for investors as they are used to earning higher interest,” Khattoare added. “Our product will be paying monthly interest in our BTL pool unlike our other pool.” Kuflink may not be delivering double digits, but it has maintained its track record of zero investor losses, even as it expands its product offering and onboards more borrowers. With more product launches on the horizon, and a number of new hires set to be announced soon, the property lender is going from strength to strength, one milestone at a time.

DATA AND TRANSPARENCY

How to read platform data Platform transparency has been a key priority for peer-to-peer lending platforms, but do retail investors know what they are actually looking for? Kathryn Gaw breaks it down…

ATA AND TRANSPARENCY have become key principles of peer-to-peer lending, and a priority of the Financial Conduct Authority (FCA). Platforms are required to be completely transparent when it comes to publishing past performance statistics, default rates and wind down plans. Meanwhile, retail investors are forever being urged to perform their own due diligence on a platform before investing any money. But what does this due diligence actually look like when it comes to judging the data and transparency of a P2P lender? “Transparency strongly correlates with lending performance and inversely correlates with many forms of platform or fraud risk (which includes, among other things, the likelihood that the platform is negligent, fraudulent, incompetent

or ill-prepared for a wind down),” explains Neil Faulkner, managing director of P2P ratings and research firm 4th Way. “Merely finding that a platform provides lots of information is the easiest filter that investors can use to build a strong shortlist of potential lending accounts. “Investors from home can do a great deal in assessing transparency without any special tools, and those methods will usually be sufficient, as it correlates very well with lending performance.” Here are a few easy ways for retail investors to check the quality of a platform’s data and its commitment to transparency… Check the platform’s real world credentials Before investing in any platform for the first time, do a couple of quick searches to find out more about its fundamentals.

All P2P platforms in the UK are regulated by the FCA, either directly or as an appointed representative of a directly-authorised firm. Perform a quick search of the FCA’s website to see if your chosen platform is actually regulated, or if it has been subject to any enforcement action in the past. You can also check Companies House to find out key information such as when the company was founded, who the directors are, and how the company has been performing financially over the past few years. Browse past lending data Every P2P platform is required to publish a full book of all historical loans showing the characteristics of the loans and their status. These can usually be found on a dedicated ‘statistics’ webpage, or under the ‘About Us’ section of the website.

DATA AND TRANSPARENCY

Look at the consistency of the returns over time, and the average default rate of the platform’s loans. You should also check the platform’s history of investor losses. Some platforms have managed to maintain a track record of zero investor losses since inception by taking a more conservative approach to risk, while others may target slightly higher returns with a slightly higher risk of default. Understand the difference between loans in recovery and loans in default The number one risk for P2P lenders is that the borrower defaults on the loan and is unable to repay the capital and/or interest. When a loan is in recovery, it means that the platform is in the process of trying to recover the money owed, but there is a good chance that the funds in recovery could turn into defaults. According to the FCA, a loan is in default if it has not been paid within 180 days of the payment date. However, some P2P platforms impose stricter conditions than the regulator, placing a loan in default within 30 days of a missed payment, or less. The platform should be extremely transparent about its definition of a default, and what action it intends to take if a borrower misses a payment. Check the FAQ section of the platform’s website for more information on their approach to collections and recoveries. Some P2P lenders will also publish statistics on past recovery actions, which may give you a sense of the likelihood of a recovery becoming a default. Target rates vs actual rates Every P2P investor is attracted

by the prospect of earning a higher return, but be aware of the difference between target rates and actual rates. Target rates are estimated by the platform and will represent the most optimistic outcome for the investor. Target rates may not take defaults into account, and they may refer to the higher-risk loan products only. Actual annualised returns will give you a better idea of what you could earn in real terms. While past performance is no indication of future success, it can be useful to match the platform’s

“ Merely finding that a platform provides lots of information is the easiest filter that investors can use

”

target returns against the actual annualised returns for the previous few years. For example, the platform may be targeting 15 per cent returns, but past returns could be closer to 10 per cent. Understanding the difference between actual and target returns can help you to manage your expectations and make better lending decisions. Be aware of red flags A lack of clear and easy to read data is probably the biggest red flag of all. Each platform should be able to explain the risks (and rewards) of their products clearly and accurately, with more detailed information available if required. The company website should contain plenty of public information on

the key people and their prior experience in lending. There should also be a full and clear description of the platform’s credit-checking process, and the steps it takes to assess loans and to go after bad debts. Each individual loan should come with a lot of detail on the borrower and the project being funded, and regular updates should be communicated to investors regarding any delays or potential recovery action. Finally, you should be able to contact your platform with ease. If it is not easy to find a phone number or email address for the firm, this may suggest a poor customer experience, which could result in frustration for investors. Use third party sources One of the trickiest things about conducting due diligence on a platform is the absence of standard metrics of data across the P2P industry. For instance, some platforms report calendar year data, while others report their data for the April-to-April financial year. This can make it hard to compare like-for-like statistics across multiple platforms. However, there are a few thirdparty sources which you can turn to for better clarity. Of course, Peer2Peer Finance News reports on all industry data and platform updates, while 4th Way offers detailed platform analyses and sector-wide ratings. Innovate Finance’s 36H Group publishes loanbook data for all of its member companies. And many retail investors find it useful to join public forums such as the P2P Independent Forum, where they can discuss platform data and performance with other retail investors.

PROFILE

Serving the underserved

The Money Platform’s chief executive George Huntley tells Marc Shoffman about the lender’s mission to help underbanked individuals while providing good returns to investors…

EORGE HUNTLEY HAS been involved with peerto-peer consumer lender The Money Platform since its early days of 2016, as he sought a start-up to make use of his entrepreneurial spirit. He has previously been head of operations and chief of finance but took over as chief executive in 2020 when Joshua Graham stepped back from the business. He explains how the P2P lending platform hopes to help the underbanked avoid illegal money lenders. Marc Shoffman (MS): What got you interested in the P2P lending space? George Huntley (GH): I worked in corporate finance at Peel Hunt and used to do really long hours. To

make that more palatable, I read a lot of the Financial Times and it had a column called Start-Up Stories. I really wanted to be part of building a business from scratch so I interviewed at a couple of other companies. The Money Platform was one where I felt there was a chance of being a co-founder and being there from the beginning. It was obviously a big change of pace. My salary went down by a lot but it has been an interesting journey. We are now in an industry with a strong footing. MS: Where does The Money Platform sit in the P2P space? GH: We are a consumer credit lender focused on short-term credit. The goal of the business is to drive down

interest rates for borrowers by using the power of the crowd. We are targeting closer to the nearprime space. A lot of our customers are extremely reliant on highcost, short-term credit. It is an underserved market and there is a big gap between the interest rates they experience. We have driven down rates for customers but to provide a product that really works for them in the longer term we need a suite of longer duration products to get them into mainstream finance and improve their credit scores, some of which are impaired. The Money Platform will be launching a 12-month product this autumn and there are also plans for an 18-month product to come later. The platform will continue to do short-term lending but our growth will be in the longer duration product. We are lending £1m per month right now and the company has been profitable so far this year. There are a lot of lenders that have withdrawn from the space so lots of customers are being increasingly underserved. Our goal is to be the P2P solution. MS: How do you assess borrowers? GH: We rely on credit bureau data and are heavily invested in open banking. There is also a behaviouralbased scorecard that looks at how a customer interacts with our website.

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It allows us to pick out customers who have good behaviour and leads to lower levels of bad debt for customers.

MS: What returns can investors get? GH: We are forecasting 12-month returns of 5.5 per cent to 6.3 per cent or around a six per cent net return.

MS: Who are your typical borrowers? GH: Our typical borrowers are aged 20 to 30. They may be suffering from the cost of living such as rent issues. These people are still relatively high earners, with income of £30,000 to £40,000, but are just poor at managing money. Often it is first generation migrants with limited credit history. They probably shouldn’t be taking on more debt but the reality is that we provide a better solution to alternatives which is often illegal lenders. This money solves a particular problem such as if a boiler is broken and needs to be fixed. We are supporting people in a regulated, legal way to give them a better interest rate compared with what they would get elsewhere. The goal is to move people from short-term dependence on cash to longer-term sustainability. We have a personal finance section on our website that helps our borrowers get in a habit of saving and managing their money better.

MS: What do borrowers pay for a loan? GH: It depends on the loan and score. The new product will start at an annual rate of 69 per cent, our typical borrower will be offered a rate of 0.7 per cent per day, which is less than the average in the sector and 40 per cent below what Wonga used to charge.

MS: Should people be reliant on short-term credit? GH: We have rules to stop people treating our product as an overdraft. It is to be used preferably once or twice when you need it. We can block people who have had a certain amount of loans with us or other providers and use open banking for this. A lot of it is about educating people on managing their money better.

MS: How did The Money Platform navigate the pandemic? GH: A million people are reliant on illegal money lenders, according to the Centre for Social Justice (CSJ). We continued lending throughout the pandemic as we knew the problem was recurring and that required our support. There was still a market for it. Returns were decent throughout the pandemic. Demand was lower but we were able to grow as fewer players were around. We showed forbearance throughout and didn’t charge additional interest for people to move payments. There were regulatory rules around forbearance and we have continued that from now. Customers did have to delay payments at the start of the pandemic but it then comes back to this idea of training people to improve their financial position. We have since had good performance from our Covid loan cohorts. Demand is now increasing a lot due to the cost-ofliving crisis. We are factoring that into our decisions. That does make it trickier to approve customers but we are concerned there would be a rise

in illegal money lending without alternatives. MS: How has the P2P lending market changed? GH: The regulator has gone from being extremely pro-P2P to appearing to treat it as risky investing. P2P can make an interesting alternative to equity market investing, as it is often less volatile but can produce decent returns. It is a shame that the FCA’s approach has changed. It seems to be treating P2P on a similar level as crypto investing, which is a massive error. Crypto is much more volatile. That said, P2P lending is an investment and there has been confusion about that in the past. There has been confusing messaging on P2P lending platforms about how quickly you can access your money. It is right that the industry has received some scrutiny and that there are now wind-down plans in place. There haven’t been any scare stories about P2P lenders recently. A lot occurred up to 2019 before the new regulations. MS: What are the platform’s plans for the future? GH: An Innovative Finance ISA may be something we consider doing. We are waiting to see where the FCA goes with its review of the P2P sector. There is the longer-term loan product being launched and we are building other products that help a particular subset of underbanked customers. We will also continue building our decision engine, incorporating open banking, so we can identify good quality customers not served by traditional finance.