Peer2Peer Finance News December 2020 by Alternative Credit Investor

THE FUTURE OF P2P

What’s the next phase for the industry?

MOTORING AHEAD

>> 18

Why P2P firms should consider car finance

HCG Funds’ Hadi Habal on opportunities in private credit

>> 16

ISSUE 51 | DECEMBER 2020

P2P lenders get ready for CBILS successor scheme PEER-TO-PEER lenders are gearing up for a successor to the government’s emergency lending schemes and are involved in early discussions this time round. It is understood that the alternative finance industry is feeding into the latest government plans to formulate a new support programme for businesses impacted by the pandemic, which will be introduced after January 2021 once the coronavirus business interruption loan scheme (CBILS) and bounce back loan scheme (BBLS) end. Applications for CBILS and BBLS were due to close in November but were extended last month until the end of January 2021. Chancellor Rishi Sunak had said in his winter economy plan in September, before the extension was announced, that a successor loan programme would begin in January. P2P industry figures are now hoping that the new scheme will be

introduced in February rather than another extension being granted. There was criticism when CBILS was first formulated earlier this year that alternative lenders weren’t involved in initial discussions. But Mike Carter, head of lending at P2P trade body the 36H Group, said platforms are feeding into these changes. “People are happy with the extension to January as there was a backlog,” he said. “The government is looking at bringing in something else longer term but this won’t be ready until sometime in

the new year. “CBILS had to be extended to fill that gap. “I think people are of the view that they should keep to the deadline and be ready to bring in something new.” Funding Circle, which was the first P2P lender to become accredited by the British Business Bank to provide CBILS, said it would welcome a new scheme. “By extending CBILS, the government is providing small businesses with much-needed support during an acute phase of the pandemic,” Lisa Jacobs, UK managing director for Funding

Circle, said. “As we look to the future, we welcome the successor loan programme, so smalland medium-sized enterprises (SMEs) can go on to invest, create jobs and drive the economic recovery.” The new lending scheme is not expected to retain the 80 per cent government guarantee which is provided for the value of CBILS loans. Stuart Law, chief executive of Assetz Capital, also an accredited CBILS lender, said he expects the successor programme will be ready >> 4 in February to

It has never been more important to keep up to date with the latest peer-to-peer lending news. These are extraordinary times and our team is working hard to keep you informed about how the UKâ&#x20AC;&#x2122;s P2P sector is responding and what new trends are starting to emerge. If you want to be the first to learn about the latest developments in the world of P2P, please purchase a subscription today. We offer a range of subscription options, starting at just ÂŁ1.95 a week. Please go to www.p2pfinancenews.co.uk/subscribe to buy a subscription today, so that you can enjoy unlimited digital access to P2PFN, with the option of a monthly print magazine. For more information on subscriptions, including overseas queries, please email 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 Michael Lloyd Senior Reporter michael@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.

he government’s emergency loan schemes have played a key role in shaping the lending industry this year. These programmes were undeniably needed to support businesses of all sizes during the Covid-19 crisis, but they have also attracted criticism due to risks of fraud, slow roll-out, their distortion of the lending market and a lack of inclusion for fintechs. Just a handful of peer-to-peer lending platforms are among the 100 or so providers that are accredited to deliver the coronavirus business interruption loan scheme (CBILS), while only Funding Circle is approved for the bounce back loan scheme. Most industry stakeholders agree that it is a shame the government did not act more quickly to utilise the country’s nimble and tech-savvy fintech lenders. As we head towards 2021, and the eventual tapering of these programmes, the question arises of what will take their place. Our front page story shows that the P2P sector is gearing up for the successor to CBILS and this time around, it is part of the conversation. Will the replacement scheme be more inclusive? And will non-bank lenders, including P2P, finally get access to the Bank of England’s term funding scheme to put them on a level playing field with high street banks? These are questions that are yet to be answered, as we head towards what is likely to be a February launch for the successor scheme.

SUZIE NEUWIRTH EDITOR-IN-CHIEF

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NEWS

cont. from page 1 boost the UK economy. “Next year we have a very deep recession to come out of and that means it’s incredibly important there is a successor scheme to CBILS that is perhaps not as generous,” he said. “The provision of government guarantees is what will keep lending flowing in 2021 and we are fully expecting another scheme to immediately follow CBILS that will be ready for applications at the start of February. “That’s our recommendation, a replacement scheme without the first year of the government paying the fees.” Roy Warren, managing director of CBILS accredited lender Folk2Folk, said the current

extension and possibility of a successor scheme gives it more time to fund loans under its accreditation providing it finds suitable institutional funders. There are, however, some fears that providing further government support could harm other types of lending. Katrin Herrling, founder of business finance aggregator Funding Xchange, said the number of lenders funding deals through the platform returned to pre-pandemic levels in September. “The problem for lenders is their balance sheets have reduced significantly,” Herrling said. “If you don’t have money out the door then the new threat is from loss of income. “Extending CBILS

beyond January risks killing off other lending activity by those actively looking to put money out as they can’t compete on the funding costs.” She said any replacement scheme needs to focus on real gaps in the market and not undermine lenders trying to return. “A new scheme should close the gap where there isn’t lending and use the alternative finance sector to give them access to subsidised funding,” she added. “There is a good case

to make to see how the market bounces back after CBILS and to be ready if a new scheme is needed.” “We are now having discussions with the government, trade associations, lenders and other stakeholders on the future design of the new scheme, which is expected to become operational in early 2021,” said the British Business Bank. “We are unable to comment further on these commercial discussions.” The Treasury declined to comment.

JustUs expects SBILS demand to pick up after government schemes end JUSTUS founder Lee Birkett said that he does not expect demand for his platform’s Small Business Interruption Loan Service (SBILS) to rise to higher levels until government support schemes come to a close. The peer-to-peer lending platform launched SBILS to provide funding for businesses that missed out on finance under the coronavirus business

interruption loan scheme (CBILS). Prospective borrowers can download and apply for the scheme on the Moneybrain app, a sister brand of JustUs. They can then list their business and raise money through crowdfunding, which the company starts repaying a year later. Birkett opened SBILS up for applications in September, expecting to see increased demand

once government support schemes closed for applications at the end of that month. However, the government schemes were since extended until 30 November 2020 and then until 31 January 2021. “We were expecting SBILS to come into its own when the government schemes were due to end, but now they are not closing until the end of January so

we’re not expecting much demand until the second quarter of next year,” Birkett said. “We’ve started seeing an increase in the number of applications again but we’re not really doing any marketing. “We’re telling people to try and get their CBILS loans and bounce back loans and to come to SBILS when the schemes end and there’s no other choice.”

NEWS

Augmentum Fintech chief: Retail-only P2P “one dimensional” OPERATING a peer-topeer lending platform that purely focuses on retail investors is too “one dimensional,” according to a prominent fintech investor. Tim Levene is chief executive of London-listed fintech investment fund Augmentum Fintech, which has a stake in P2P lender Zopa. Levene said Zopa’s recent launch of a digital bank to complement its P2P business gives the firm extra options and is good for retail investors. “Being a pure marketplace is too one dimensional as we have seen with businesses not

attracting the premiums they were three or four years ago,” he told Peer2Peer Finance News. “Propositions come in and out of fashion both in the US and the UK. “We have had some high-profile businesses list and not perform as investors would have hoped, that casts a shadow across the sector, which is unfair. “The P2P umbrella was always too generic, the real question is, what is the underlying lending proposition?” “We are more focused on the tech and risk capabilities.” Augmentum also

invests in alternative lender Iwoca, which is an accredited lender under the coronavirus business interruption loan scheme (CBILS). Levene said the government’s initial financial response to the pandemic was an “opportunity missed” due to how long it took for fintech firms to get approved. “CBILS and bounce back loans were a great opportunity to leverage fintech,” Levene said. “The government got there in the end but ultimately quite late in the day. “It has been difficult for existing financial institutions who have not

built scalable platforms to sustain demand so hopefully now there will be more collaboration.” Levene added that the fund is not looking to add any more lenders to its portfolio currently but is interested in digital wealth management, crypto platforms and payment infrastructure. Augmentum Fintech raised £28m through an oversubscribed share placing in October, which, Levene suggested, was helped by the pandemic. “The pandemic has put us on the radar of more prospective investors who have been looking at diversification,” he said.

Landbay boss moots stamp duty holiday extension LANDBAY chief executive John Goodall said the property market has benefited from the stamp duty holiday and he would not be surprised if the tax break were extended past its 31 March deadline. In July, Chancellor Rishi Sunak cut stamp duty on the purchases of homes up to £500,000 in England and Wales for both residential and buy-to-let. Goodall said the stamp duty holiday has boosted the housing market and he thinks it could be extended like other types of government support such as furlough.

“The stamp duty holiday has definitely helped, bringing some business forward as well as the incentive to purchase now,” Goodall said in an interview with brokerage Goodbody. “It equates to about a £15,000 saving depending on the value of the

property. It was applied to the buy-to-let sector and has been having an effect. Most areas of the mortgage market are busy right now. “In terms of whether we expect it will be extended we have no insight but everything else the government has implemented

has been extended, such as furlough. “If other measures were extended beyond March and a lot will depend on the vaccine programme and what happens with the virus, I wouldn’t be surprised if the stamp duty holiday would be extended in some way even if it becomes different to what it is now.” Last month Landbay agreed a new funding line with an asset manager, to help it meet the increasingly high demand for its buy-to-let mortgages ahead of the end of the stamp duty holiday.

A LOOK BACK AT 2020

2020 in numbers:

Another year of change for the P2P sector In the last issue of Peer2Peer Finance News in 2020, we take a look back at the biggest events in an eventful year for the peer-to-peer lending industryâ&#x20AC;Ś

Platform acquisitions Lending Works announced in July that it had been bought by Intriva Capital, while RateSetter confirmed in August that it had been acquired by Metro Bank.

Years of P2P The industry celebrated its 15th birthday this year, when the worldâ&#x20AC;&#x2122;s oldest P2P lender Zopa marked its 15th anniversary in March.

P2P lenders accredited to CBILS Funding Circle was the first P2P firm to be accredited for the government-backed coronavirus business interruption loan scheme, followed by Assetz Capital, then Folk2Folk and LendingCrowd.

A LOOK BACK AT 2020

Members of the 36H Group The industry’s new trade body launched in January, replacing the now-defunct Peer-to-Peer Finance Association. Its founding members comprise Funding Circle, Zopa, RateSetter, Lending Works, Assetz Capital and CrowdProperty.

34.9 per cent

More than

£2.7M spent on Lendy administration so far

A progress report in June said that the administrators of the collapsed P2P platform have incurred time costs totalling £2,766,824.

The representative variable annual percentage rate of Zopa’s new credit card

Funding Circle has facilitated more than

£800M of CBILS loans

Last month, UK managing director Lisa Jacobs revealed there had been strong uptake of the scheme and said that two thirds of its CBILS borrowers are new to the platform.

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NEWS

P2P lenders are going green INVESTORS do not have to wait for a government bond to go green with their money, thanks to a raft of alternative finance opportunities supporting renewable energy projects. Chancellor Rishi Sunak unveiled plans last month to issue the UK’s first ever sovereign green bond to help the UK meet its 2050 net zero target and other environmental objectives. It will not be launched until next year but there are already ways to support clean energy projects in the peer-to-peer lending and crowdfunding space. Abundance has worked with councils this year to provide community municipal bonds that support renewable energy projects in a local area. More than £2m has been

raised so far for West Berkshire and Warrington councils. Bruce Davis, managing director of the ethical crowd bonds platform, said there are more council projects in the pipeline. “We are expecting four or more raises next year including Leeds City Council,” he told Peer2Peer Finance News. “We are aware of around 15 councils who are actively considering issuing green bonds.” He said all P2P lenders should consider how their lending is aligned with the goal the UK has set to become net zero by 2050. “It would be remiss for a sector which is driven by a desire to change finance for the better not to set an example to the traditional

lending institutions as to how that goal can be a central part of a business strategy,” Davis added. Some alternative lenders such as Downing Crowd, Folk2Folk and Crowdstacker already offer green energy investment opportunities. Crowdstacker raised £1m last year for a project with Prime Agri, which provides funding for agricultural, horticultural and rural small businesses with a focus on renewable energy.

Chief executive Karteek Patel said its green investments typically attract higher sums and Crowdstacker has more in the pipeline for next year. "Environmental and social governance is such as buzzword in the investment industry at the moment that it would be easy for it to be just a box ticking exercise rather than a fundamental guiding principle,” Patel said. “But it needs to be a fundamental guiding principle.”

Bounce back loan fraud impacts car finance industry

CAR finance brokers and providers are seeing decreased business due to consumers fraudulently using bounce back loans to purchase cars outright, according to a broker in the space. Zac Choudhri founded car finance brokerage Prime Personal Finance in January and has since diversified into selling cars as well. He said that he has seen

customers eschew his in-house finance brokerage in favour of bounce back loans. Bounce back loans come with a 100 per cent government guarantee on the value of the loan and have a 2.5 per cent interest rate, with nothing payable for the first 12 months. “When you sell a Range Rover it’s not normally someone treating

themselves to a car but to someone who is slightly better off than the average household and is able to qualify for it and buy it,” Choudhri said. “But now we’ve sold so many on direct payment. We promote and recommend our in-house car finance brokerage and show the benefits of it, but some people said ‘no, we already have a 2.5 per cent loan’.

“We’ve sold cars to these people and absolutely loads of people with business loans have just bought cars and this has generally affected car finance brokers and providers. “Car prices have gone up as a result of these loans. No one was getting finance, so they raised prices on cars. It has had a massive knockon effect.”

Providing practical and targeted advice for P2P platforms Corporates, investors and regulators trust us to support them through challenging periods of change and uncertainty Support with underperforming loan portfolios

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To find out how we can help your business mitigate risk and realise its potential, contact: Chris Laverty Partner, Head of Financial Services Restructuring and Insolvency T +44 (0)20 7865 2302 E chris.m.laverty@uk.gt.com

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JOINT VENTURE

Resilience is the key to Covid survival Operational resilience has never been more important for the peer-to-peer lending sector, says Chris Laverty, partner and head of financial services restructuring and insolvency at Grant Thornton

EER-TO-PEER LENDING platforms must focus on their operational resilience in order to effectively serve both borrowers and investors and thereby secure their long-term future, Chris Laverty, partner and head of financial services restructuring and insolvency at Grant Thornton, has warned. The Covid-19 pandemic has created a “massive test” for financial services firms, Laverty believes. However, there are a few things that P2P lending platforms can do to ensure that they survive the disruption of the coronavirus pandemic. “It's essential to shore up the health and sustainability of the platform,” says Laverty. “This is a time when you should be actively testing the resilience of your business, identifying trigger points and putting robust governance procedures in place for when tolerances are breached. To do this you have to look at each and every important driver of your business.” The primary concern for all P2P platforms should be the investor, she adds. Those platforms which have chosen to increase their lending have a duty of care to their investors to ensure that they will be able to recover borrowed funds. Laverty suggests that investor dissatisfaction could result in many lenders leaving the platform, which could create a liquidity squeeze that can have long-term consequences. “That's a key concern for a

P2P platform because borrower performance might be impacted, and it might go on to affect your secondary market,” says Laverty. “A lot of P2P platforms run a vibrant, robust secondary market where their investors are trading loans. And if you're not able to provide up-to-date information on the borrower, then you’re not only looking at current issues that affect your business, but ultimately longer-tail issues on borrower performance, existing borrower profile or borrower acquisition that might affect the future sustainability of the platform. “My focus would therefore be on the borrower value to the investor,” she adds. “But I would suggest that operationally most people are aware that their focus should be on keeping their current borrowers and performance levels to a point where investors are staying with the platform.” Laverty goes on to list other

operational functions that should be tested for their resilience. “Platforms need to consider the people within the business, and their ability to work remotely and continue to do their jobs normally,” she says, adding that they should ensure that their usual funding channels are able to withstand the pressures of the pandemic. Laverty also highlights the importance of checking in withthird party contractors that are important to the platform, to review their corporate resilience. “We've heard of cases where third-party contractors have let platforms and other lenders down because they didn't have sufficient capability for their own staff to do remote working,” she adds. IT is another crucial area that cannot afford to be overlooked, while cyber risk should be a priority for any business which relies on remote working and IT solutions. Platforms may be tempted to think that they have already completed their resilience planning before the pandemic, as it was a key focus for the Financial Conduct Authority in 2019. However, Laverty cautions against that. “Resilience planning needs to be an ongoing process, especially given that so much has changed in the markets as well as the way we all work,” she says. “In the short term, it's all about sustainability and ensuring that your operational and financial resilience remains intact.”

FUTURE OF P2P

The next evolution

Consolidation, public listings or platform collapses – what does the ‘new phase’ of P2P lending involve? Michael Lloyd investigates…

HE PEER-TO-PEER lending sector has undergone many changes since the launch of Zopa in 2005. Against a background of low interest rates, higher demand for credit solutions and ongoing economic uncertainty, the P2P sector is entering a new phase of its evolution – one which will almost certainly involve consolidation. The pandemic and subsequent economic downturn has already taken a toll on P2P platforms, with concerns ranging from higher defaults, to fewer new investors, to the challenge of working remotely for a prolonged period of time. As a result, some platforms have opted to wind down, scale back, or pause new lending. And of course, this has led to new rumours around

consolidation. But that is not the only change set to impact the P2P sector in 2021 and beyond. “We’re about to go into a new phase for P2P lending,” says Daniel Rajkumar, managing director of Rebuildingsociety. “Since the Financial Conduct Authority (FCA)’s postimplementation review, we have a better, new regulatory standard for P2P. “And if capital is allocated appropriately with the right risk analysis, and platforms are carefully

“ We’re about to go into a new phase for P2P lending

”

operating with the phases of the economic cycle, P2P has a really good opportunity to support the economic recovery and could become one of the best performing asset classes of this decade.” With the coronavirus crisis going on for longer than expected and sector instability as some platforms pause their lending, it is a precarious time for the industry. And loss-making P2P lenders without good portfolio management and controls could very easily end up in difficulty. “There has been a substantial reduction in the number of platforms and there will continue to be a steady trickle of collapses, but not in great numbers,” says Stuart Law, chief executive of Assetz Capital.

FUTURE OF P2P

“We can see the market seems to be holding and it looks like the sector has a future.” Despite this, the P2P lending sector has so far been resilient, with many platforms still generating market-beating returns to investors and some even flourishing while traditional lenders have tightened their criteria. The consensus is that the better platforms will survive the test of Covid-19, but it will ultimately lead to consolidation and an improved reputation for the sector. “I think there will absolutely be more consolidation in the marketplace,” says Atuksha Poonwassie, managing director of Simple Crowdfunding. “P2P is, and will continue to

become, more of a recognised finance tool. I think the future of P2P lending is massive and even more so because of a poorer 2020.” The majority of platforms are

And Starling Bank chief executive Anne Boden revealed at the LendIt Fintech Europe 2020 virtual conference in October 2020 that the bank will “probably” acquire a

“ I think the industry could become 10 times bigger over the next decade”

optimistic about the future of the sector and believe there will be more partnerships and acquisitions fuelling this consolidation. This seems to be the case already with Metro Bank acquiring P2P lending platform RateSetter in September, for an initial consideration of £2.5m, with up to £9.5m to be paid out after the completion of the deal.

lending platform within the next year or two as it seeks to grow its small- and medium-sized enterprise loan originations. P2P platforms are attractive to banks due to their proprietary technology and lending volumes. This has already resulted in a number of partnerships over recent years. Starling has a forward flow

FUTURE OF P2P

arrangement with Zopa and a deal with Funding Circle to lend £300m through the coronavirus business interruption loan scheme (CBILS) to small firms through its platform. “More platforms will be bought by banks,” predicts Neil Faulkner, managing director at P2P analysis firm 4th Way. “P2P lending platforms will be attractive targets for banks and the entrepreneurs who set them up will all be considering sales to banks as a possible way to cash in.” Faulkner adds that he does not expect to see formal mergers between equals, but the acquisition of loanbooks from platforms that have chosen to wind down. “Some will see the opportunity that P2P lending offers and enter the market,” says Simple Crowdfunding’s Poonwassie. “And once they do, it might make sense to work with an existing platform.” However, Mike Bristow, chief executive of CrowdProperty, points out that mass consolidation has not happened yet. “Everyone has talked about consolidation for years, but it has not really transpired,” he says. “It will happen by weaker players not being able to continue so there will be fewer platforms.” Covid-19 is certainly weeding out the weaker players in any sector, but the same can perhaps be said for regulation. Towards the end of last year,

“ The market seems to be holding and it looks like the sector has a future

”

the City regulator introduced a raft of new measures including an appropriateness test, a cap on retail investments in P2P and stricter wind-down plans for platforms. Some industry stakeholders believe that the FCA will introduce even stricter regulations which will make it harder for smaller platforms to survive. It has been suggested that the FCA will clamp down on P2P investment accounts that have been marketed as ‘easy access’ but prevented lenders from withdrawing their funds during the pandemic. “P2P regulations are still in their infancy, and the regulator has learnt a great deal over the years as

to what works and what does not work,” says Jonathan Segal, partner and head of alternative finance at law firm Fox Williams. “I think we will see a tightening up of regulations in the short-term.” Lee Birkett, founder of JustUs, believes there will be a potential increase in capital adequacy requirements for platforms. “We basically do nine tenths of what a bank does and have a more robust financial model,” says Birkett. “Not much needs changing.” However, Assetz Capital’s Stuart Law argues that this depth of regulation would not be introduced in the P2P sector as banks adhere to much more detailed, stricter rules. “Banks are so dangerous that the

FUTURE OF P2P

But as long as platforms continue to generate attractive returns, the consensus is that more money will flow into P2P. Mike Carter, head of P2P platform lending at trade body the 36H Group, points out that the larger platforms such as Assetz Capital, Funding Circle and Zopa are always evolving their business models and attracting more institutional money, showing the strength of the sector. “It’s an important strategic step in the development of the sector: having proven their ability to originate high quality customers,

their diversification into institutional funding sources.” Meanwhile, Stuart Law believes the P2P sector will follow the normal curve that most markets follow, which he describes as initial excitement followed by massive growth, which then slows when reality sets in before good ideas can lead to an expanding sector. “I think the industry could become 10 times bigger over the next decade,” he says. “If the sector continues to improve it could become very large in years to come. But if it continually delivers

“ Everyone has talked about consolidation for years, but it has not really transpired”

level of regulation they have is off the scale compared to other firms,” he says. “They borrow 90 per cent of their capital so need incredibly detailed and controlling regulation to ensure they’re safe enough. P2P was set up to be a simpler structure and is nowhere near as risky.” Stricter regulations have increased the costs of authorisation and compliance, so industry stakeholders believe there will be fewer new platforms entering the sector. Furthermore, increased competition in most segments of the lending market mean that existing platforms are having to work hard to grow loan originations and attract new investors.

they can diversify their funding sources and offer a wider range of products while retaining their P2P platform and ethos at the heart of how they do business,” says Carter. “A good example is Zopa’s recent launch of its credit card, having secured a bank licence. Attracting institutional money to the sector or obtaining a banking licence is a very strong validation of the quality of their P2P business models and will result in stronger businesses going forward.” Industry onlookers also believe that retail investors will play an important role in the future of P2P, via savvy platforms that understand the importance of diverse funding sources. “Following the Covid-19 crisis we expect retail P2P to resume its growth path as platforms restore their lending,” says Carter. “So, we expect this type of funding to grow over time, but it will become a smaller proportion of total funding by platforms as a consequence of

disappointment and failures it would likely struggle to grow and die away. The future is in the hands of each individual company in the sector. “There has been a substantial reduction in the number of platforms, which will continue to a degree and bigger platforms will continue to move in a direction of institutional capital. I think this will result in a smaller, well-functioning market with quality firms that deliver a good service and return to investors throughout the cycle.” In the meantime, the P2P sector is at the mercy of the economy, the regulator and the public’s appetite for investment and borrowing. One year from now, consolidation may have resulted in fewer platforms and a higher quality of products for borrowers and lenders, with more institutional capital and a growing base of retail investors. Whatever the next phase of P2P lending might bring, platforms are not going to stop innovating, evolving and growing.

PROFILE

Opportunities in private credit

HCG Funds founder Hadi Habal speaks to Marc Shoffman about the alternative investment manager’s allocation strategy

NSTITUTIONAL INTEREST in fintech lenders – including peer-to-peer lending platforms – is on the rise. One player in this growing market is HCG Funds, an alternative investment manager that specialises in backing private credit originated through fintech platforms. It was set up in 2010 by Hadi Habal and Jose Penabad, who used to work together at investment bank JP Morgan. The fund doesn’t publicly comment on the platforms it invests through but is reported to have backed loans through LendingClub and Climb Credit in the US. Habal explains the fund’s approach to Peer2Peer Finance News, when they may be ready to invest in UK platforms and his number one rule. Marc Shoffman: Which regional markets are you focused on? Hadi Habal: Everything we have done so far has been in the US. The risk-adjusted returns continue to be superior in US dollar terms compared with everywhere else. The only other market that made sense was the UK but we hit the pause button after the Brexit vote. There was too much currency risk as we are dollar denominated. We decided not to proceed until there was more clarity and four years later we still haven’t made any investments. We need to be comfortable with the volatility in the UK first before investing. Other than the US, the UK is the

only other market that provides depth, a common scoring standard for consumer credit, a legal framework and societal respect for contract law. Both legal systems are rooted in the same legal code. The UK has a distinct advantage in business lending which is why Funding Circle came out of the UK and not the US. We don’t have a Companies House equivalent. Small business lending in the US didn’t take off in a comprehensive manner until you had payment

system companies provide their own solution, outside of that there is no common data. MS: Are there not opportunities in Europe? HH: Europe sounds interesting but when you look at implementation, the attractiveness comes down. First there are the risk-adjusted returns, which are meagre. We are in a world where returns are low, but they are depressed even further in Europe as the

PROFILE

region’s governments are stepping in to buy collateral. There is this conceivable large market that should be attractive on paper but the returns are way below the hurdle rate. The European Union also has operational challenges and roadblocks, with lots of bureaucracy that you don’t get in the US or UK when setting up a business. Looking at capital allocation, am I better off investing in a small opportunity in France or something potentially bigger in the US? Ireland is culturally the most similar, the problem is depth. Would HCG set up an entity to purchase loans that originate in Ireland on a standalone basis? That wouldn’t be the best use of capital. MS: How do you decide where to invest? HH: Every time we look at an opportunity we have to assess it in its own micro market which limits choice. There is a cultural parallel that’s important. There has to be an acceptance that someone is going to borrow and pay back credit without somebody needing a stick to chase them. That social contract is really important and is often found in a country’s DNA. If you look at India, which is a huge market with a robust banking system used to microcredit, you would think this would be a great place to go. The loss experience has been higher in India though as there is a perception that they can get away with not paying money back. The Africa experience has been the same. Platforms have taken the model to go to large emerging markets and leapfrog the banking system with noble intentions to take

credit to the masses. But the reality is that these assets have underperformed. MS: How do you decide what to invest in? HH: My number one rule is you have to grow slower than the growth in that market. You are always tempted, when you see something new, to grow as fast as you can. The problem is you may end up with more capital than the opportunity. In that situation your inclination as an asset manager is to deploy the capital, so you end up doing stupid things and make sub-optimal decisions because you grew too fast. That’s painful at first but it gives you flexibility, it forces you to be disciplined. In the early days we invested in consumer loans as there wasn’t anything else. In the US the next largest market was state-backed student loans. The pricing on these didn’t work for us as it was too long-dated and the riskadjusted return didn’t fit. The next vertical is small businesses but this is limited because of the lack of centralised scoring systems. Our view early on was that allocating to small businesses in the US was tricky as there isn’t a dataset to train a platform for credit underwriting. It is much easier to underwrite consumer loans. The market we looked at after consumer was fix-and-flip real estate mortgages, which is similar to the work LendInvest does in the UK. We think LendInvest is an attractive platform. There is lots of residential data in the US as there are many people buying homes, rehabilitating them

and then flipping them for profit. It also has the security of the property. It’s a great business to be in coming out of a recession but it is cyclical and we stopped buying those mortgages two years ago. On a risk-adjusted return basis there are plenty of opportunities elsewhere in other sectors. We are active in skill-based education and payment systems around small businesses. MS: What is the biggest challenge for an institutional investor? HH: The biggest challenge we have is educating investors about the asset class, particularly around losses. At a basic level we invest in loans. Those loans look like many loans that have been around for hundreds of years Losses are going to happen. Some investors come in and say I can buy this consumer credit yielding 13 per cent, they buy a pool of loans and find their net return is five per cent and they cannot reconcile why. Investors also don’t understand the nuances around prepayment. In the US and the UK, the majority of loans can be repaid early with no penalty but then there is less interest paid to the investor. One has to underwrite that loss expectation from the beginning. My sales team is talking to asset managers and family offices. Often, they will just say it must be too risky for such high rates of return. But then you point out how much they are paying on their credit card and they are shocked to see it is a lot more. These are conversations with professional investors so you can imagine what it is like with retail investors.

CAR FINANCE

Driving forward

More P2P platforms should look at car finance, writes Michael Lloyd

AR FINANCE IS AN area relatively untapped by peer-to-peer lending platforms, with one exception. Consumer lender Zopa is the only P2P car finance provider in the UK, specifically offering car loans, as well as a personalised car hire purchase (HP) product. Some platforms – for example, Lending Works and Elfin Market – offer consumer loans which can be used to purchase cars. And RateSetter provides asset-backed finance for dealerships to stock up on cars, funded by its investors. Following its acquisition by Metro Bank, RateSetter’s unsecured personal loans – which can be used to buy cars – will be funded by the challenger bank

rather than its P2P investors. But Zopa is still the only P2P lending platform offering a specific car finance product. Buying a car with car finance is pretty similar to purchasing a house, in the sense that there is a valuation and the consumer works with a broker to find the best deal. But it gets more complicated when it comes to personalising specific products. A standard car loan is where the provider lends enough money to make up the shortfall between the car’s price and valuation, so that the borrower can buy it outright. The borrower will then repay the lender in monthly instalments over an agreed period, adding preagreed interest.

HP is where the borrower makes monthly payments to a car finance company to hire the car and will only own it after the final payment. Meanwhile, personal contract purchase (PCP) products have lower monthly repayments because the consumer is only paying a portion of the car’s value. At the end of the contract, the borrower can pay a final balloon payment of what the car is worth to keep it, or they can keep the car by continuing to hire it back as it depreciates in value, or return it and take out a new arrangement on a fresh car. “Going back 30 years, people owned cars from day one by paying with cash or a personal loan,” said Adrian Dally, head of motor finance at the Finance & Leasing

CAR FINANCE

Association (FLA). “HP came out after that and was the most popular [option]. It reduced the risk and interest rate, which is very attractive to buyers. “Then PCP took over and is currently the most popular, having been so for the past 10 years.” But with only one platform offering a specific car finance product, the P2P sector appears to be missing a trick.

considering whether to launch into this space. “It is a market that is interesting to us,” he says. “When we look to go into a new market, we conduct extensive R&D to make an informed decision about if we think it is a market we can do well in or not. This is something we will do in due course for car finance, however there is no date for that piece of work to kick off yet.”

“ People in the UK are becoming more open to shopping around for their own car finance deals”

Tim Waterman, chief commercial officer at Zopa, says the platform entered the car finance market after noticing that traditional car financing options were slow to adapt to consumer needs. “With unsecured car loans being one of the key reasons customers came to Zopa, we identified a great opportunity to provide a better service to customers and greater access to alternative financing products via online channels,” he says. “In fact, our most recent research even highlights that people in the UK are becoming more open to shopping around for their own car finance deals, with 60 per cent saying searching online for car finance is their preferred option.” Zopa’s research suggests that car finance is a niche that deserves a closer look. And it appears that some P2P platforms are starting to realise the opportunities in the car finance market. William Rist, head of partnerships at Lending Works, says that the consumer P2P lender will conduct its own research and development (R&D) on the market, before

With lots of P2P business and property lending and still relatively little personal lending in the P2P space, car finance is one of the few holes remaining in the industry. Neil Faulkner, managing director of P2P analysis firm 4th Way, expects this to change due to the “attractive economics” of this lending segment. “It surprises me that no P2P lending company in the UK has

taken on the niche of car finance as its main focus and there is certainly a lot more space for car loans,” he says. “I hope that P2P lenders are giving car finance some serious thought. Borrowers need it and investors could always benefit from even more lending diversification. “Based on the attractive economics of vehicle financing, I would expect that both P2P consumer lending and P2P business lending platforms would consider tapping into this space.” There are plenty of reasons as to why platforms, especially those offering personal loans, may want to consider car finance. 4th Way’s pre-Covid data on P2P car finance showed losses before interest of four per cent over the full life of any loans, which are easily covered by less than one year's interest, while average lending rates are seven per cent per year. “Bearing in mind the ease with which lenders can theoretically spread across a large number of car loans, the risk-reward basis for this

CAR FINANCE

kind of lending makes it a good way to diversify,” Faulkner says. “Recoveries of car finance bad debt in the P2P lending industry have not been impressive, suggesting that, if more specialist expertise was brought in, losses would come down further.” Another allure of the car finance market is its significant growth in recent months. During the March 2020 lockdown, the car finance market all but disappeared, with dealerships closed and consumers purchasing cars via click and collect orders. But since then there has been an uptake in car sales, and thus car finance. In September 2020, according to FLA figures, the market reported annual growth in new business volumes of seven per cent compared with the same month in 2019. Meanwhile, the risks of the pandemic have led to more people seeking to buy second-hand cars as a safer alternative to public transport. “In light of Covid-19, more people are switching from public transport to getting back on the road as a safer way of travelling,” says Callum Walsh, managing director of car finance broker Match Me Car Finance. “I feel whilst Covid-19 has had a financial impact on the economy and people’s personal circumstances, there will always be a need for car finance and that need can only get stronger as a result.” Platforms can enter this space relatively easily by undercutting the current deals while still offering competitive car loans to borrowers, and charging enough interest and fees to cover risks. However, the market is not very competitive on fees, and new rules from the Financial Conduct

“ If a borrower is

unable to get car finance, they are unlikely to get a personal loan to purchase the car

”

Authority will be implemented in January 2021 to ban discretionary commission models that some car retailers and motor finance brokers use. Zac Choudhri, who launched car finance broker Prime Personal Finance in January this year, says his firm charges less than the main dealers, at about seven to nine per cent. “The lowest the main dealers go to is about 9.9 per cent, while that’s the highest we charge,” he says. “It hasn’t been very competitive for us offering lower rates.” Affordability and creditworthiness

are key factors that lenders look at when assessing borrowers, and the pandemic has led to lending being tightened across the board. Choudhri says it’s much more difficult for anyone with a thin credit file or people who are self-employed to obtain PCP car finance now. “If you're a prime customer with a great credit score and history it’s very easy to get car finance and you can be approved on the day, maybe even within 15, 20 minutes,” he says. “But for those with a thin credit file or who are self-employed, it

CAR FINANCE

“ I hope that P2P

lenders are giving car finance some serious thought

”

depends how the provider responds. “Even if they are working throughout the lockdown and the current climate, providers think these borrowers may not be able to sustain payments in the future.” With car finance providers tightening their belts, now could be a great time for P2P platforms to enter this space. If they partner with an open banking provider, it could be even easier. Credit reference agency Credit Kudos is working with several lenders and brokers in the car finance market to provide up-to-

date open banking insights to help them better measure a borrower’s creditworthiness. This helps customers access more financing options faster, especially supporting those traditionally underserved such as the self-employed. Waterman says Zopa helps borrowers access car finance by offering secured and unsecured car finance loans as separate products, with both options funded by its P2P investors and its bank. “For our HP offering, we carry out

all background checks on the car, process all online paperwork and contact dealerships directly about the money,” he explains. “Offering both unsecured personal loans and HP makes it easy for people to pick the finance option that works best for them.” Nick Harding, chief executive of Lending Works, believes that personal loans for car purchases do have their place. “PCP requires a vehicle worth a certain amount in certain conditions,” he comments. “Borrowers might use a personal loan to make up the balance to buy an older car they can’t get a lease for. “But if a borrower is unable to get car finance, they are unlikely to get a personal loan to purchase the car. Car finance typically has more flexible credit risk appetite, with the security in the vehicles, whereas unsecured loans have tighter credit.” While Harding is interested in the opportunities presented by car finance, other P2P consumer lenders such as Elfin Market have told Peer2Peer Finance News that they are not considering making any inroads into the space. With more people getting back on the road in the pandemic era, car finance is set to continue to grow, so this is an untapped opportunity for the P2P sector. As the market grows, perhaps more platforms will follow Zopa’s lead and realise the car finance space is worth a closer look.

Peer2Peer Finance News December 2020

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