Peer2Peer Finance News March 2017 by Alternative Credit Investor

PLATFORMS WORK TO PREVENT AUTOBOTS

>> 6

IT’S THE ECONOMY, STUPID

>> 12

Users are gaming the system

How will the sector fare in a downturn?

MarketInvoice’s Anil Stocker reveals his plans for growth >> 16

ISSUE 6 | MARCH 2017

The great IFISA conundrum

P2PFN investigation reveals several authorised firms are unaware of the product, while the biggest platforms are still awaiting approval A NUMBER of firms authorised to offer the Innovative Finance ISA (IFISA) are unaware of their status or even what it means, Peer-to-Peer Finance News has learnt. With most of the major peer-to-peer lenders still awaiting approval to offer the tax-free wrapper, a legal expert said that it “doesn’t make for a level playing field”, while one chief executive of a platform said it gave him concerns that there was a “tick-box approach” to authorisation. 30 companies are allowed to sell the tax-free wrapper around P2P investments to consumers, according to

HMRC’s latest list that was updated on 7 February. But several authorised firms contacted by P2PFN had not heard of the IFISA and had no idea that they were licenced to offer one. In fact, one company director appeared unaware of what an ISA was in general. It must be emphasised that the majority of IFISAauthorised firms are fully aware of the product and their regulatory responsibilities. A number of well-known P2P lenders have recently gained authorisation and this is in no way to suggest that they were found to be unaware of their obligations to the

regulator and to consumers. Companies wishing to offer the IFISA to consumers must first receive full authorisation from the Financial Conduct Authority (FCA), before applying to HMRC for

IFISA manager status. The FCA application process can be lengthy and the ‘big three’ P2P lenders are still awaiting authorisation after nearly 18 months. In contrast, HMRC approval is broadly seen as more >> 4

Allen: Most lenders want comfort of provision fund THE MAJORITY of lenders considering peer-to-peer would want the reassurance of a provision fund, according to P2P credit risk expert Kevin Allen.

The industry veteran, who was RateSetter’s firstever chief risk officer, said that less engaged investors would be better off choosing a platform with a

provision fund and lower returns. “I think the majority of lenders – the less engaged lender, like my mum and dad – don’t want to be

choosing their loans, they don’t want to be choosing their platforms,” said Allen, who is now chief risk officer of P2P payday lender The Money Platform. >> 5

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EDITOR’S LETTER

Published by Royal Crescent Publishing

WeWork, 2 Eastbourne Terrace, Paddington, London, W2 6LG info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk +44 (0) 7966 180299 Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk PRODUCTION Karen Whitaker Art Director Zac Thorne Logo design COMMERCIAL sales@p2pfinancenews.co.uk SUBSCRIPTIONS AND DISTRIBUTION info@p2pfinancenews.co.uk Find our website at www.p2pfinancenews.co.uk Printed by The Manson Group ©No part of this publication may be reproduced without written permission from the publishers. Peer-to-Peer Finance News has been prepared solely for informational purposes, and is not a solicitation of an offer to buy or sell any peerto-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.

HAT does the future of peer-to-peer lending look like? That is a question that many industry onlookers have asked in recent times. P2P has grown rapidly and regulators across the world are still getting to grips with a sector that encompasses so many different business models. While its supporters are forecasting this growth to continue, some of its critics are questioning the sector’s resilience. One argument is that P2P is yet to prove its mettle during a downturn – something it is unlikely to have the opportunity to do any time soon, if our feature on the global economy is anything to go by (page 12). I am convinced that P2P can weather a recession, even if less robust players fall by the wayside. Regardless of economic conditions, it seems likely there will be some consolidation this year, leaving just the best and the brightest – which is no bad thing. As I mentioned in my editor’s letter last month, the key challenge going forward will be finding suitable borrowers to meet the influx of demand from investors. Extremely low interest rates on both sides of the pond have boosted interest in the sector, but there is a risk that attempting to match these inflows could have a negative impact on the quality of loans underwritten by the some of the platforms. On a backdrop of political upheaval across the Western World, the future is uncertain. However, P2P is an industry that is nimble and creative – qualities that will hold it in good stead in more challenging times. SUZIE NEUWIRTH EDITOR-IN-CHIEF

NEWS

cont. from page 1 of a formality and takes a few weeks. “The HMRC process is quite light, it’s nothing like FCA authorisation, so if you were already FCA authorised it would be quite straightforward,” a legal expert on the sector told P2PFN on the condition of anonymity. “It’s more like a registration process, so it might just be someone entrepreneurial deploying the licence on the off-chance. “However, it does feel odd and it doesn’t make for a level playing field.” HMRC said that it does

not reveal the nature of the checks that it carries out on individual applicants for an IFISA licence. “On receipt of an application we carry out appropriate and proportionate checks, including considering whether the applicant has the required regulatory permissions and discussions with FCA and the applicant where necessary,” said an HMRC spokesperson via email. In terms of how HMRC’s ISA authorisation is different from the approval given by the

FCA, the spokesperson said: “HMRC is considering a firm’s eligibility to be an ISA provider, including their ability to discharge all the obligations set out in ISA legislation - in relation to the account holder and HMRC.” “I’m concerned about the regulatory process,” said the chief executive of one P2P lender still awaiting authorisation. “You’ve got firms that know what they’re doing but can’t offer the IFISA and others that can offer it but don’t know about it.

“It suggests that there’s this tick-box approach, where the box is being ticked without any understanding of being ticked.” A spokesperson from the FCA said that approval to be an IFISA manager is governed by HMRC and is a tax-related issue. He added that during the FCA authorisation process, they ask firms if they intend to offer an IFISA. Firms making material changes to their business model post-authorisation are required to formally notify the FCA.

P2P lenders see value in branch networks

BANKS may be closing branches up and down the country, but peer-to-peer lenders are recognising the

benefits of having a local presence. Research by consumer watchdog Which? found that more than 1,000 branches of the main high street lenders including Halifax owner Lloyds, RBS and HSBC, closed in 2016. Banks point the blame at a lack of use and a move to mobile banking, but many P2P firms are seeing the value in both technology and a local presence when it comes to lending. Assetz Capital announced in September that it is planning to hire 35 relationship directors and open new branches across the country to support its expansion into smallbusiness lending. Stuart Law, chief

executive of Assetz Capital, said the platform is aiming to have between 10 and 12 branches by the end of this year. “The bank branch network is expensive. They are dealing with people who occasionally come in to bank a cheque,” he told Peer-to-Peer Finance News. “Our branches are different. They provide a hub for borrowers to put forward a proposition for lending.” Bricks Finance, a development finance P2P lender, takes the same approach. Rather than purely communicating online, investors and borrowers have to meet directly with the Exeter-based firm to discuss their options.

“As we are lending our money alongside our investors it makes good business sense for us to meet local lenders and borrowers,” said Clive Banks, director of Bricks Finance. Another platform, Folk2Folk, is planning to grow from three to 10 branches across the UK by the end of the year. “By having a physical branch, we can offer a very personalised and friendly service rather than just being online, which tends to be a user-led, oneway experience,” said a spokesperson. “Our branches are a way to help our borrowing customers come in, sit down and get a decision in a matter of days rather than weeks.”

NEWS

cont. from bottom story page 1 “If having a provision fund means that sort of reassurance but they’re only going to get five per cent returns, they’re happy with that. They don’t want to get seven per cent and have to get emails about bad debt. “That reassurance comes at a cost and that cost is maybe one per cent or two per cent. But I think there’s a vast majority of normal lenders in the UK who would prefer it that way.”

However, Allen said he thought that more confident investors seeking higher returns should choose P2P investments that are not covered by a provision fund. “If you’re an engaged, risk-taking, early-adopter P2P lender, you probably shouldn’t lend with a provision fund, because ultimately it does mean your returns will be lower,” he said. “You should be

willing to lend without a provision fund, to maximise your returns.” Allen said that during his time at RateSetter, where he went on to become head of retail lending, he got called an “enthusiastic provisioner” because of his desire to boost the amount of money put into the fund. He cited a recent report by P2P investment firm Bondmason, that criticised the use of provision funds

as they eat into returns. Despite his predilection for provision funds, Allen agreed that the report showed “good logic”. “It’s just a marketing tool really, to give the impression that you’re really safe – ‘we’re the biggest, put your money there’ – and it’s true,” he said. For more on Allen and his plans for The Money Platform, read the full interview on page 8.

P2P in legal “grey area” with wholesale lending

PEER-TO-PEER finance platforms are being warned against falling into a legal “grey area” after it emerged that the Financial Conduct Authority (FCA) does not believe wholesale lending complies with industry regulations. Legal expert Gillian Roche-Saunders, partner at BWB Compliance, said platforms must keep pace with FCA rules. “More than ever it has become possible for platforms to undertake

banking or other regulated activities by accident and it is crucial that all platforms keep pace with what the FCA now expects of them,” she told Peer-to-Peer Finance News. “Wholesale lending is the latest in a long line of risk areas and brings an added challenge in that P2P platforms now also need to ensure that their business model doesn’t cause the wholesale lender to perform banking activities unknowingly.”

Platforms are aware of regulatory concerns, but the Financial Conduct Authority (FCA) has not officially confirmed its stance on the matter yet. A number of P2P platforms have had wholesale lending operations in the past, where they lend investors’ money to other lenders. RateSetter has been transparent about the fact that wholesale lending made up part of its loan book. A spokesperson said they sought clarification from the FCA last October over wholesale lending and decided to stop taking on new wholesale partners in December. Industry insiders say the definition of wholesale lending can vary to mean lending to another lender that manages the loan however they want, or a platform that lets another

company do specialised lending on its behalf but remains the lender of record. They predict the FCA will be less concerned about the latter, as there is a more transparent link between the original platform and the borrower. “The way the FCA is interpreting the rules seems to be rather unfortunate and over complicates how much lenders need to know about where their money is going,” said Angus Dent, chief executive of ArchOver. Dent said that ArchOver does not do wholesale lending but has funded a trade finance company. “They are a trading company that takes ownership of its goods and services,” he said. “It is legally and structurally not wholesale lending.”

NEWS

Lenders work to prevent autobots MONEYTHING is planning to introduce velocity checks and lock outs on its peer-to-peer lending platform, to prevent autobots gaming the new and secondary market. Ed Pearce, managing director of MoneyThing, said investors had raised issues about its new and secondary assetbacked business loans disappearing off the market very quickly due to automated trading. Pearce said it is not a major problem, but it is not in the spirit of P2P. The platform has put processes in place to stop the same transaction taking place within three

seconds, meaning a user would now get an error message instead. “We have only noticed this from a couple of users,” Pearce told Peer-to-Peer Finance News. “As platforms start to grow it is an inevitable thing that there will be users who try to game the system. We can use velocity checks similar to banks stopping cards when there is unusual activity.” Other platforms, such as Saving Stream, have also said they are on the lookout for autobots. “We have not had any obvious issues with autobots being used but we are aware that investors

on other platforms have said they have experienced some issues in this respect,” a spokesperson said. “Our aim is to make property investing as fair as possible and any tool or programme that gives a person or organisation an unfair advantage should

be discouraged. “We’re looking into the fairest way to discourage it without penalising legitimate investors, but it is a very difficult issue to police. We would encourage all investors to let us know if they believe an autobot might be active.”

REGULATION UPDATE

30 firms approved to offer IFISAs AROUND 30 firms are now able to offer the Innovative Finance ISA (IFISA), as approvals gather pace towards ISA season. Lending Works, Lending Crowd and Landbay launched the tax-free product last month. Meanwhile, Money&Co, the platform founded by City superwoman Nicola Horlick, gained full Financial Conduct Authority (FCA)

authorisation and is aiming to launch its IFISA by early March. Platforms need full approval from the City regulator and HMRC in order to offer the IFISA to consumers. In other news, the industry’s self-regulated trade body, the Peer-toPeer Finance Association, gained a ninth member last month. Cornwallheadquartered lender Folk2Folk, which

originates secured business loans online and through high street branches, joins Zopa, RateSetter, Funding Circle, LendingWorks, Landbay, LendInvest, MarketInvoice and ThinCats, who collectively make up more than three quarters of the market. On a wider level, it appears that the FCA is still grappling with the challenge of regulating

innovative industries. Chairman John GriffithJones said in a speech that “the remorseless march of technology” meant that “rules that were designed for the paperwork era do not work necessarily for the online one”. The question of whether wholesale lending complies with P2P regulations also came under scrutiny, as we discuss in more detail on page 4.

NEWS

Platforms develop their own SIPPs PEER-TO-PEER platforms are developing their own self-invested personal pension (SIPP) products, as mainstream SIPP providers tend to eschew the sector. Crowdstacker and Folk2Folk have both told Peer-to-Peer Finance News that they are working on their own pension offering. While P2P loans are technically allowed in SIPPs, connected parties rules stipulate that there must be no connection between the lender and borrower. This provides a challenge for SIPP providers if a P2P loan is allocated to a large number of borrowers. “The connected parties rule has been tricky for SIPP platforms to negotiate, particularly if a P2P loan is spread amongst hundreds or even thousands of borrowers, and this is even more complex if it involves auto-allocation,”

said Mark Bristow, cofounder of P2P platform Crowdstacker. “Similarly, where some SIPP investments are relatively small, finding a cost-effective solution for lenders that sufficiently remunerates SIPP trustees for the work involved in terms of due diligence and processing, and the additional capital adequacy requirements, has proved difficult.” There are also concerns that the P2P loans may go towards residential property, which is not permitted in a SIPP. RateSetter, which is not planning to develop its own SIPP, has established partnerships with mainstream providers SippClub and London & Colonial. However, the platform admits the structure can be difficult for P2P investors. “There is a considerable regulatory burden attached to the product, which can make the costs

unwieldy if you do not have a reasonable pot to invest,” said a spokesperson. One way around this is to invest in P2P-focused investment trusts, such as the Funding Circle SME Income Fund or P2P Global Investments, which can be held in a mainstream SIPP as shares. The rationale for mainstream SIPP providers is that this makes P2P less risky as it is clearer who owns the asset. Danny Cox, head of communications at fund supermarket Hargreaves Lansdown, which is currently developing its own P2P platform, said holding P2P loans in a SIPP was too great a risk.

“Our SIPP doesn’t accommodate any P2P investments, other than the P2P investment trusts,” he said. “Some SIPP providers are happy to accept this risk and holders are duty bound to check that there are no breaches of connected party rules. “Demand from SIPP investors for P2P is relatively small, but growing fast.”

ArchOver hopes to launch IFISA at start of new tax year ARCHOVER is expecting to become fully authorised by the Financial Conduct Authority (FCA) in the coming weeks, but may have to hold off on launching an Innovative Finance ISA (IFISA) until the start of the next tax year.

The lender, which provides secured business loans and offers returns for investors of 7.14 per cent, said it plans to partner with Goji to operate its tax-free wrapper. Peer-to-peer technology provider Goji already

works with Landbay, UK Bond Network, Downing and Peer Funding to provide the administration and functionality behind their IFISAs. “We are on the cusp of full FCA authorisation,”

Angus Dent, chief executive of ArchOver, told Peer-to-Peer Finance News. “It may be a bit tight to launch an IFISA for this tax year but we are planning to provide one to investors.”

PROFILE

Risk and reward

What Kevin Allen doesn’t know about credit risk isn’t worth knowing. The Money Platform’s new chief risk officer talks to Peer-to-Peer Finance News about being an early adopter, his time at RateSetter and finding a gap in the short-term lending market…

E SOMETIMES FORGET IN OUR LIBERAL-ELITE BUBBLE OF LONDON THAT THERE ARE PEOPLE who don’t earn a lot of money,” asserts Kevin Allen, the recently-appointed chief risk officer of The Money Platform. “If that person’s boiler breaks and they’ve got to find £750, the sad truth is that a large percentage of the UK population doesn’t have £750 lying around. “Those people don’t have prime credit ratings because they don’t have a lot of credit, but they certainly don’t have negative credit.” This is where Allen sees a gap in the market for The Money Platform, which is the first fullyauthorised peer-to-peer payday lender. Allen, a self-declared socialist, is clearly motivated by the idea of providing easier – and more affordable – access to credit for the wider population. Allen has worked in risk management for the consumer lending sector throughout his career. After holding credit risk roles at a number of blue-chip firms including MasterCard and LloydsTSB, he joined RateSetter, where he became their first chief

risk officer and spent three-anda-half years shaping the platform’s credit decision strategy. Allen is an exceptionally early adopter of P2P and was one of Zopa’s founding lenders, so moving into a career in the sector was an attractive prospect for him. “I got a call from a recruitment agent and he said, ‘it’s not for you, Kevin, but there’s this crazy little P2P lending company called RateSetter. Great set-up’,”

pounds a month, the vast majority of the world had never heard of P2P and there certainly wasn’t a magazine like Peer-to-Peer Finance News.” During his time at RateSetter, the platform grew from £2m-£3m a month of lending up to £60m a month, while the provision fund grew from around £600,000 to

“ I don’t think I could ever go back to a blue chip” Allen reminisces. “As soon as he said that I said, ‘that’s going to be my job, I want that job’. So I met [RateSetter’s co-founders] Pete Behrens and Rhydian Lewis and got on really well with them. “I think they thought yep, got a personal connection there, he knows risk management and he’s also a P2P lender. That’s just nuts. 500 people in the world were lending at the time and you’ve got this guy. “It was a small company at the time, I was staff number 14, they were lending a couple of million

more than £20m. “It was a great journey and I thoroughly enjoyed it, but I got the bug for building something new,” said Allen. “I don’t think I could ever go back to a blue chip.” The Money Platform was recommended to Allen by a friend, so he went for a chat with the lenders’ co-founders, Charles Balcombe and Joshua Graham, and liked what he heard. “It’s very impressive, what they’ve done,” he says. “The Money Platform has been incubated by the Financial Conduct Authority (FCA), so they’re fully FCA

PROFILE

authorised, which amazingly is more than you can say of Zopa, RateSetter and Funding Circle.” In comparison to some of the big-name payday lenders in the market, The Money Platform offers a relatively low representative APR of 165 per cent. Loan terms range from three weeks to 12 weeks and the maximum loan size is £1,000. “The Money Platform is not sub-prime or pay-day, it’s shortterm lending,” says Allen. “There’s definitely a gap in the P2P market for that.” Allen is adamant that he is not trying to turn The Money Platform into RateSetter 2.0. The two companies have very different profiles, he explains. “RateSetter very clearly has a target borrower, which is low risk,” he says. “The defaults they’re looking for is a certain percentage in the low single digits. They would want to be the first P2P platform that someone would lend on. The Money Platform is never going to be either of those things.” The Money Platform’s investors can expect returns of around 12 per cent, but of course, that reward comes with a risk. “I wouldn’t necessarily recommend lending on The Money Platform to some of my more risk-averse friends or my family,” Allen continues. “It’s a platform you go to when you’ve got quite a diverse range of investments already. You’ve probably already got savings, premium bonds, some equities, you probably already lend on one or two of the large P2P platforms and you want to diversify further and aim for a higher return.”

owever, one area where The Money Platform is aligned with the larger platforms is that it faces the challenge of finding suitable borrowers. A number of platforms and commentators have predicted that this will be a key issue for the sector this year, partly due to an influx of yieldhungry investors in a low interest rate environment. The Money Platform is lumped together with other payday lenders on comparison sites, which is both an asset and a disadvantage, Allen explains. “The Money Platform is much, much cheaper for borrowers, so we are top of the charts on any affiliates where we are on the tab for pay day,” he says. “The problem is, of course, that the people applying tend to be your payday, sub-prime typical borrowers with impaired credit. “Therefore our approval rates at the moment are very low. We’re looking for the type of customer where they’ve got clean credit, they just don’t have a lot of savings. “So that’s the issue at the moment, finding that niche of borrower, because there isn’t really an obvious place where those people go.” It is clear that Allen relishes the challenge of building up a new P2P platform. He concedes that there is “an awful lot of work to do…credit policy, product, collections, payments”, but he evidently has a lot of respect for the business model and the team. “It’s so far from a finished product,” he says, “but it’s exciting, it’s good, I’m enjoying it.”

ALLEN ON… …THE FUTURE OF P2P “Recession or no recession, a lot of platforms will close in the next 24 months because they’re not going to achieve scale. It’s not as easy money as all these venture capital backers perhaps thought it was going to be. Some of these platforms are lending next to nothing every month. That’s not sustainable. “Lenders should make sure they are choosing platforms with strong balance sheets. When a recession comes, returns will inevitably reduce because the bad debts will go up and your returns are going to come down. “However, I think the bigger issue is that new money won’t go on to the platforms, because the perceived risk will be so much higher. “As a result, platforms will be forced to offer higher returns, which will mean they won’t be able to do as many loans, so they will have liquidity issues. Some of the platforms will struggle to be profitable and some will close because of that. “So I think the recession will just filter out the weaker players, which is no bad thing, because there are too many platforms. But I think the larger, solid balance sheet platforms will continue to thrive.”

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COMMENT & ANALYSIS

Opportunity of a lifetime There is a huge pool of potential borrowers just waiting to be unlocked by peer-to-peer lenders, says Angus Dent, chief executive of ArchOver

UST BECAUSE A BUSINESS APPLIES FOR A PEER-TOPEER LOAN, it should not be assumed automatically that it must have been turned down by its bank, or that it is a sign of desperation from a company under financial pressure. On the contrary, raising finance for the right reasons, and on the right terms, is a mark of strength rather than weakness. If there is a message, it is one of confidence in the future. In the majority of cases – such as when the owners want to grow their business by investing in, say, technology, new plant and equipment, talented staff or to finance stock for the export market – borrowing extra finance for the purpose can actually be a very smart thing for a company to do. Rather than wait to generate the money out of cash flow, it can be the fast track to the next level of development. One of ArchOver’s earliest borrowers, TruTac, a tachograph analysis specialist company, has gone on record as saying that the extra funding we were able to provide enabled the business to grow by 70 per cent in just two years. Of course, it is true that many companies, small- and mediumsized enterprises (SMEs) in

particular, look first to their bank for finance. If they are turned down, they believe that to be the end of the road and simply give up. Nowadays we know better. For whatever reason, loan applications can sometimes not meet a bank’s lending criteria, but it does not mean that finance is not available from another source that takes a different view. The government’s bank referral scheme, that went live at the beginning of last November, was introduced precisely to

December reflected the situation, showing that SMEs are tending to borrow less and deposit more; SMEs borrowed 13 per cent less in the third quarter of 2016 than in the third quarter of 2015. At the same time, SME deposits rose by five per cent to over £170bn. This tells me that there is a huge amount of potential growth just waiting to be unlocked. It is no secret that, in general, the P2P sector has a surplus of yield-hungry investors over good quality borrowers. Hopefully,

It is all a matter of confidence combined with “awareness of what alternatives are available” combat this problem, guiding ambitious smaller companies to alternative, non-bank providers of finance. It is too early to say whether this initiative has achieved any measure of success because the statistics are not available yet. And in any event, the period in question has been somewhat clouded by uncertainty surrounding Brexit and the election of Donald Trump to the American presidency. The last figures issued by the British Bankers’ Association in

this will be a short-term phase because, with interest rates dragging along at all-time low levels, right now represents the most attractive borrowing opportunity for decades. This holds true whether you are a consumer wanting to raise a mortgage or the owner of a successful, creditworthy SME waiting for the opportunity to grow the business. It is all a matter of confidence combined with awareness of what alternatives are available.

FEATURE

It’s the economy, stupid

Peer-to-peer lending has thrived on both sides of the Atlantic, in an era of low interest rates and solid economic growth. But how will the sector hold up if conditions change?

EER-TO-PEER lending platforms have built a global following off the back of low interest rates, with the eight biggest lenders in the UK attracting more than £7bn, while US P2P giant Lending Club has originated $25bn (£20.1bn) of loans, as of 31 December 2016. The sector is thought to be worth £106.4bn globally, according to a recent joint study by accountancy firm KPMG and the Cambridge Centre for Alternative Finance. But the changing global outlook and unfolding of issues such as the new Trump administration and Brexit could all weigh on inflation and interest rates, hitting confidence among P2P investors. This comes at a time when the P2P market is arming itself with institutional investors and

successful securitisations, but could an interest rate rise and changing global landscape dampen demand from lenders and borrowers? The US and UK economies have mainly defied expectations of their demise so far. In the US, President Trump’s support for infrastructure, financial services and home-grown companies has helped the Dow Jones Industrial Average break through the 20,000 barrier for the first time. Employment figures showed 246,000 new jobs were added in January, the highest rise since June 2016. Similarly, in the UK, the gross domestic product data for 2016 showed the economy grew by two per cent over the year, the fastest in the G7, despite dire warnings over the Brexit vote.

The “ unpredictable

nature of a Trump administration creates uncertainty, especially if protectionist rhetoric starts to outweigh promises of stimulus

”

P2P TIMELINE MARCH 2005:

FEBRUARY 2006:

Zopa launches in the UK, becoming the first company to offer peer-topeer loans in the world

Prosper launches in the US, followed by Lending Club

Even the Bank of England has raised its forecasts. It is now predicting two per cent growth in 2017, revised up from 1.4 per cent and is forecasting 1.6 per cent growth in 2018, up from 1.5 per cent. The FTSE 100 has also been breaking records, surpassing the 7,000 barrier. But analysts on both side of the pond are not sure that the good times will continue. “Despite a seemingly ongoing resilient performance at the end of 2016, 2017 is likely to be an increasingly difficult year for the UK economy. Like a slow puncture, we suspect that the economy will gradually lose air as the year proceeds,” said Howard Archer, chief European and UK economist for research firm IHS Markit. “Specifically, we expect GDP growth to slow to 1.4 per cent in 2017 as

FEATURE

consumer fundamentals weaken markedly and uncertainty is heightened by the government triggering Article 50 to formally start the UK’s exit from the European Union. “Consumers are highly likely to face markedly diminishing purchasing power over the coming months as inflation rises appreciably and earnings growth is limited by companies striving to limit their costs. In addition, unemployment seems likely to rise over the coming months, despite the recent resilience of the labour market.” A subdued economy would dampen business growth, which would have a knock-on-effect on P2P business lenders looking for suitable borrowers. Meanwhile, shrinking purchasing power, low wage growth and rising joblessness could shrink the pool of good quality borrowers for consumer platforms. There have also been some signs of caution in the US, with GDP estimates coming in below expectations at 1.9 per

Like a slow puncture, the UK economy “ will gradually lose air as the year proceeds ” cent in 2016, when many economists anticipated growth of more than two per cent. While President Trump’s plans to boost infrastructure spending have buoyed the markets, he is an inexperienced politician who has not fleshed out many of his policies yet and the long-term outlook is still uncertain. “The unpredictable nature of a Trump administration creates uncertainty, especially if protectionist rhetoric starts to outweigh promises

of stimulus,” said Trevor Greetham, head of multi asset at Royal London Asset Management. “Political risk is likely to create bouts of negativity in 2017. We have a new and unpredictable leader in the White House, Brexit negotiations and a series of important elections in Europe and it would not be surprising to see red on the screens from time to time.” This widespread uncertainty across the Western World is already feeding into inflation. Consumer price inflation

in Europe jumped to 1.8 per cent in January, from 1.1 per cent in December 2016. In the UK, the cost of living rose to a 31-month high of 1.8 per cent in January, up from 1.6 per cent the previous month. And in the US, it climbed to a four-year high of 2.5 per cent in January, from 2.1 per cent the previous month. Central banks could respond to rising inflation by raising interest rates, which most analysts believe the US Federal Reserve will do. But a rate rise in the UK seems further away;

2007:

JUNE 2012:

NOVEMBER 2012:

Financial crisis hits, causing banks to tighten up lending, which creates an opportunity for the nascent P2P sector

The UK’s ‘big three’ – RateSetter, Zopa and Funding Circle – have now issued over £250m of loans

Lending Club, which is now the world’s largest P2P lender, hits the $1bn lending milestone and announces that it is cash-flow positive

FEATURE

Ensuring businesses can access “finance is crucial for economic growth ”

Archer believes the Bank of England will hold off through this year and next. Either way, P2P platforms face contending with a higher interest rate environment or lenders with less purchasing power, or both. Gill Cardy, insight consultant at financial research firm Defaqto, says the changing outlook will make individual lenders take more time assessing the type of borrowers they lend to. “Investors may wish to see more information presented as part of the due diligence made available to help their decision making,”

she tells Peer-to-Peer Finance News. “From the investor point of view, a continued low interest rate environment will continue to make P2P seem an attractive option, but there should be a greater focus on identifying the accompanying risks associated with each particular business model.” Cardy says platforms will need to be better at showing how loans would perform in different scenarios. “Whilst platforms tell us that they engage in stress testing, few are quite as good at actually telling investors what returns they may expect in different

scenarios, net of defaults,” she explains. “Some platforms do disclose an anticipated default rate across their total business, but turning that into ‘what does that mean for the rate of return you are quoting to me?’ is harder to come by.” Other industry analysts feel it would take a big rate rise to have a material effect on the P2P sector. “P2P lending is very likely to respond to interest rates in the same way that bonds, the stock market and many other investments do,” says Neil Faulkner of 4th Way. “When interest rates increase slowly, the attractiveness of P2P lending will not significantly change, keeping pace to stay significantly ahead of savings accounts. “If interest rates rise swiftly, this is typically caused by rapid inflation. During these times, the attractiveness of P2P lending will fall, because it will temporarily be difficult to keep up with inflation, although the same will also be true for savings accounts and non-P2P investments.”

P2P TIMELINE CONT. FEBRUARY 2016:

MAY 2016:

Chinese P2P lender Ezubao is shut down by authorities who described it as a Ponzi scheme. China starts to make efforts to regulate the fastgrowing sector more tightly

Lending Club becomes embroiled in a highprofile corporate governance scandal, sending its share price crashing down

However, he warned that if bank rates got very high, some investors might consider it unnecessary to lend through P2P during those times and would move to safer savings accounts and cash ISAs. he growing alternative finance market has proved attractive to institutional investors in the investment trust space, with funds such as the P2P Global Investments (P2PGI) and VPC Specialty Lending set up to invest in P2P loans. They have already started responding to the changing global outlook. For example, P2PGI has aimed to mitigate more competitive personal loan pricing by shifting its focus to asset-backed investments. The latest investor update from P2PGI in January highlighted property-backed loans and trade finance as growth areas for the market and said the risk-adjusted returns were more attractive. But some of the main P2P platforms seem less concerned about changes to interest rates. David de Koning, head

FEATURE

of communications at Funding Circle, says the platform’s estimated annual return of seven per cent should appeal to investors regardless of the interest rate environment. “Ensuring businesses can access finance is crucial for economic growth,” he explains. A RateSetter spokesperson similarly affirmed that their proposition would still be attractive, regardless of a rate hike. “When the Bank of England base rate rises, it is likely that there will be a prompt increase in the cost of borrowing from banks,” he says. “It’s not clear that banks will be so quick to pass on a rise to their savers. For example, if you look at the period of January 2011 to July 2016, the average rate paid on a savings account fell 1.29 per cent to 0.34 per cent despite no change in the base rate. “But if you assume that they do, what will happen is that rates for savers and borrowers will both rise but the spread is likely to remain consistent. “We believe that supply

JUNE 2016:

and demand would cause rates on our platform to rise – both for borrowers and investors – and they would remain within that spread, meaning that we still offer a good deal to both sides and rates remain attractive.” Even if fewer people were borrowing money and investor returns fell, the spokesperson said this would be likely to be balanced out by similar conditions in the wider economy. Another risk for P2P is that increased uncertainty could hit institutional investor confidence in this nascent asset class. Institutional money now makes up around a third of the UK P2P market, while in the US it is more than 90 per cent. Securitisation – where platforms package up loans and sell them on to institutional investors – is commonplace in the US and is starting to happen in Europe as well. Funding Circle became the first European P2P platform to have its business loans securitised in April last year and was followed by Zopa in the consumer space

NOVEMBER 2016:

Britain votes Donald Trump is to leave the elected the 45th Economic Union president of the United States

last September, with both offerings well received by investors. De Koning says Funding Circle is not planning to change its strategy. “Increasing the number of securitisations to promote new sources of funding for small business loans is a stated aim of the Bank of England,” he says. “We are proud to have participated in the first securitisation of SME loans in Europe and we look forward to supporting more in the future.” Funding Circle’s confidence in the capital markets suggests that institutional interest in

little political uncertainty about the P2P lending industry, thanks to the overall high standard of performance and competence within the industry, and the lure to the government of being at the forefront of the burgeoning fintech industry. “For the most part, the government and the regulator have been highly supportive, even as they learn how to better regulate this new industry to ensure its standards remain high.” There may be uncertain times ahead, but borrowers

the Bank of England base “rateWhen rises, it is likely that there will be a prompt increase in the cost of borrowing from banks

P2P is not going away any time soon. “More P2P securitisations are inevitable as funds, platforms and financial advisers seek to capitalise on investors who want to take part in P2P through more traditional investing channels,” says Faulkner. “There has been relatively

”

will always need finance and savers are constantly on the lookout for a decent return. Traditional banks tend to shut up shop when times get tough, but now could be the time that P2P, born out of the most recent financial crisis, shows its innovative side once again.

JANUARY 2017: Data from the Peer-to-Peer Finance Association showed that cumulative lending through eight of the UK’s largest P2P platforms hit £7.3bn by the end of 2016

PROFILE

Making capital work MarketInvoice’s co-founder and chief executive Anil Stocker tells Peer-to-Peer Finance News how the platform plans to double its lending this year and team up with banks while beating them at their own game…

016 WAS A GOOD YEAR FOR MARKETINVOICE. The peer-to-peer invoice finance platform quadrupled its lending over the last 12 months, bringing its cumulative total to more than £1.1bn – equating to an impressive average of £2,196 lent every minute to UK businesses. The firm shrugged off Brexit to raise £7.2m from Polish private equity firm MCI Capital in July, made a number of senior hires and moved into a shiny new office in fintechfriendly Shoreditch. The money raised from MCI Capital last year was primarily used to build new products, invest in automation and improve technology. The platform has spent money building up its algorithms and putting more data into its risk modelling, so that it can offer more automated services and boost its decisionmaking processes.

But the company has even more ambitious plans for 2017. MarketInvoice is aiming to almost double its lending to £2bn this year, aided by its new product, MarketInvoice Pro, which launched last month. It offers businesses an open funding line against their outstanding invoices, in contrast to the lender’s core invoice-byinvoice finance product. “This is the first new product since we launched in 2012, so we’re very excited about that,” chief executive and co-founder Anil Stocker tells Peer-toPeer Finance News. “Pro will play a very big role in [meeting our £2bn target] because when a company starts to use Pro, they do regular drawdowns and it’s for larger amounts, so the volume that they put onto the platform is far greater than the clients who are doing invoice by invoice.” MarketInvoice Pro is designed for slightly larger companies, who turn over

more than £1m per year, compared to the platform’s original product that can be used by companies that are turning over as little as £100,000 per year. “This is a £21bn market in the UK that’s traditionally been dominated by the banks,” says Stocker. “A lot of people will be very attracted to our new product and we’ll be able to take a big market share away from the banks.” There are also plans for another product to be launched in the middle of this year. Stocker would not disclose any details, except to say that it was still in the invoice finance space. On one hand, Stocker is hoping to take market share away from the

banks with MarketInvoice Pro, but developing partnerships with them is also a key focus this year. This is a path already explored by several P2P lenders, such as Funding Circle and Santander, or Zopa and Metro Bank. “You will have seen some of our historical partnerships with accountancy firms and local councils, but actually we believe that collaborating with banks is going to be an important part of the future for P2P platforms,” says Stocker. “A lot of banks have woken up to the opportunity of partnering with fintech companies. They realise it would take them too long to build the same system that we have

PROFILE

and there are interesting ways that we could work together. So we’re having some really great, interesting conversations there.” Stocker is tight-lipped about the exact details of the potential partnership, which is likely to be announced this month, but he does say that it has “never been done before here in the UK”. “Metro Bank and Zopa was a funding partnership, but we’re also in discussions for a deeper kind of integration, where a bank would potentially refer their customers on to

our platform and we would collaborate in servicing them,” he adds. n a wider level, Stocker is feeling confident about the economic climate for his business. “Personally I don’t think interest rates are going to go up any time soon,” he says. “But even if they did, firstly they’d have to rise a long way because they’re so low at the moment and also, if you look at invoice finance through the cycle, even in high interest rate environments, it’s still a very popular product.

“Of course, I think retail investors tend to keep more money in the bank when interest rates go up. If you’re getting two or three per cent in the bank, do you want to go through the effort of investing in P2P to get four or five? “However, institutional investors are still very keen to make good returns in those conditions, so I don’t think that it’s really going to change the flow of capital into P2P if interest rates go up.” With the government on the brink of triggering Article 50, many analysts

and media commentators have expressed concerns about the impact of Brexit on the economy, businesses and international investor perception. But Stocker remains unfazed. “I can’t predict the future, but what I can tell you from a ballpark perspective is that Brexit has not had a big impact on our business borrowers,” he says. “In fact, some of the exporters have done better than normal, because they’ve been taking advantage of the weaker pound to sell into the

PROFILE

NO RULES, NO RETAIL MarketInvoice is part of the Peer-toPeer Finance Association (P2PFA) and abides by its rules on transparency, but unlike the other seven members is it not regulated by the Financial Conduct Authority. Invoice finance does not come under the City watchdog’s remit as technically the platform is selling invoices rather than lending. “We think that over time, invoice finance should be regulated because it’s a massive market and there are a lot of traditional players who take advantage of the fact it’s not regulated to charge higher fees and put lots of onerous conditions on business users,” says Stocker. And unlike most P2P lenders, MarketInvoice does not accept any retail money – its investors are highnet-worth individuals and institutions.

States and other places. “Obviously there are some industries where a recession could mean less orders coming through for suppliers, such as construction or retail, so we’re keeping an eye on that, but for the moment it’s business as usual. “On the investor side, we have a lot of UK-based investors who are looking to invest in pound assets as much as they were before. We have some international investors

who actually put more money in because the pound went down, so they were able to transfer money and deploy more. But I wouldn’t say it has impacted the business greatly so far.” Even if there were a full-blown recession, Stocker argues that there would be a resilient demand for invoice finance. “Companies still need the cash to pay suppliers and there’s less options out there

A lot of “banks have

woken up to the opportunity of partnering with fintech companies

”

in a recession,” he says. “It doesn’t really change much about our business, but obviously we would like to be in a growing environment because it’s generally better for the UK.” Stocker says that the short duration of MarketInvoice’s products is an added advantage. With invoices typically paid within a couple of months, the company is able to scale in and out of sectors much faster than a long-term platform.

Looking further ahead, geographical expansion is on the cards. Interestingly, it is fragmented Europe, rather than P2P powerhouse America, that is top of Stocker’s wish list. “First the European brand, then the worldwide brand,” he declares. “All businesses around the world have the same problem: they need cash. “In the next three to five years, we’ll look at certain European markets. Spain is interesting, Germany’s

PROFILE

MARKETINVOICE IN NUMBERS £1,109,188,414 The volume of invoices funded so far (as of 15 February 2017)

£2,196 The average amount lent per minute to UK businesses in 2016

£59,730 Average invoice value

41 Average invoice duration in days

European brand, “thenFirstthetheworldwide brand” interesting, France and Poland are interesting. Then, if we start to get into trade finance, helping people trade around the world, that automatically turns us into a global business.” There is less opportunity to disrupt the US market as there are so many banks and unsecured lending providers, according to Stocker. And what about a longawaited UK P2P initial

public offering? “My philosophy is you build a great business and the exit takes care of itself,” he says. “As we get bigger and bigger and build out our tech, we become a very attractive acquisition target for financial institutions, but we can also definitely think about listing in the future. “Ultimately it would be exciting to list a company or just keep on growing as a private company.”

81 PER CENT Customer retention rate

Source: MarketInvoice

predict the future, “butI can’t what I can tell you is that Brexit has not had a big impact on our business borrowers

”

FEATURE

Building blocks

Blockchain is the latest trend in the fintech community, attracting hundreds of millions of dollars in new investment. Is the peer-to-peer lending sector missing a trick?

N THE VAST AND DIVERSE WORLD OF FINTECH, innovations come and go. But a few ideas manage to break through into the mainstream, changing entire industries and solving consumer problems. One of the bestknown fintech winners is, of course, peer-topeer lending. But 2017 is

already shaping up to be the year of blockchain. From the US to China, blockchain start-ups are receiving millions of dollars in investment from some of the world’s leading financial institutions. Earlier this year, JPMorgan and Goldman Sachs pledged $18m (£14.5m) in funding for New York-based

blockchain infrastructure start-up Axoni. Just a few weeks later, Credit China Fintech Holdings announced a $30m joint venture with blockchain infrastructure provider BitFury Group in a bid to develop the new technology in China. In fact, JPMorgan and Goldman Sachs have been investing heavily in

blockchain over the past year. Last February, the two firms announced a $60m investment into Digital Asset Holdings (DAH), a blockchain distribution platform founded by former JPMorgan executive Blythe Masters. It is also worth noting that DAH was seeded in 2015 with $50m from investors including JPMorgan, Citigroup, Deutsche Boerse and the Depository Trust & Clearing Corporation (Wall Street’s book-keeper). A recent study by Juniper Research has estimated that an impressive $290m was

FEATURE

Ultimately, I hope we’ll have a “ blockchain-based market, like an open

stock market, that will allow to trade publicly any kind of alternative assets

”

invested in Bitcoin and blockchain start-ups globally in the first six months of 2016, and 2017 is already off to a roaring start. However, while banks and investors are racing to be a part of the blockchain revolution, P2P lenders are holding back. “P2P has enough innovation and I believe there are no benefits currently from using blockchain technology in the sector,” says Chris Hancock, founder and chief executive of Crowd2Fund. “With blockchain as a concept, one main benefit I can see is for the Bank of England to use it to track interbank transfers and introduce a degree of transparency and efficiency to this area of the financial infrastructure. There may be many other potential benefits from Blockchain but they are too far off and would need a significant shift from today’s banking systems in my opinion.”

The idea of offering transparency and tracking technology to their customers may seem innovative to investment banks and retail banking groups, but it is nothing new for P2P lenders. After all, the P2P sector has been built around the demand for greater transparency and straightforward transactions. Although it has been around since 2009, the vast potential of blockchain technology is still being unlocked and it may still prove useful to P2P platforms. Automated P2P investment service Lending Robot prides itself on being the first P2P lender to embrace blockchain and uses the technology to allow clients to diversify their investments across a number of different P2P platforms. “Unlike a traditional hedge fund, we want to be

completely transparent,” says Emmanuel Marot, founder and chief executive of the Seattlebased firm. “So we disclose to our clients every detail of every single note we invested in. “Blockchain comes on top of that, as a way to stamp our ledger and prove that we did not tamper with them. Being scalable, reliable and cheap is what makes it appropriate in our case.” However, Marot concedes that while it makes sense within his business model, blockchain “still has few real-world needs.” This is a sentiment which is echoed across the industry. “As blockchain becomes a more mainstream part of financing it will then have benefits and opportunities for P2P, but does it answer a real problem in the P2P space at the moment? Maybe not,” says Richard Cohen, senior associate

at law firm Allen & Overy. “Perhaps that’s why there hasn’t been a big rush thus far. “It’s not that there are necessarily a lot of barriers to it but it’s early days and there’s a lot of things that need to be done. For entities like P2P that are relatively new, they don’t want to do something that will put them on the wrong side of the regulator.” Regulatory concerns are very real for the UK’s P2P sector, as many platforms are still awaiting full authorisation from the Financial Conduct Authority. This has led many lenders to take a cautious approach towards any operational changes. However, when it comes to blockchain, this caution may be misplaced. “Most of the regulators that we have spoken to are at least supportive of people using Digital Ledger Technology (DLT) and we haven’t come across any regulator who

FEATURE

is actually blocking it,” says Wei Keat Ng, global chief operating officer of digital ledger services at KPMG. “As a minimum, most regulators are keenly observing developments, as they’re interested in the efficiencies of the system.” “Blockchain is not regulated yet,” adds Cohen. “While there is a certain amount of thinking that needs to be done around some of the legal implications our sense is that these can be managed.” Indeed, a number of P2P lenders told Peer to Peer Finance News that they were holding off on blockchain not because they worried about regulatory repercussions, but because they simply couldn’t see how it would add value to their business. Blockchain is still relatively new and the scarcity of blockchain infrastructure and distribution specialists means that any foray into this world is bound to be expensive. Londonbased consortium R3 is attempting to address this by creating its own blockchain hub, but there is still a way to go – last December, R3 downgraded its fundraising expectations from $200m to $150m. And UK-based P2P lenders are not exactly tripping over themselves to implement the technology.

“Maybe with global alignment of fintech regulation and a multi government initiative, P2P could utilise blockchain to reduce money laundering risk and improve know your client processes,” says Hancock. “However, with the current status quo, it would introduce more unnecessary risk and complexity. In the meantime, it may be down to the traditional banks to take the lead on blockchain’s evolution. Barclays has its own blockchain division and in September 2016 it conducted its first trade finance deal using the technology. Around the same time, Standard Chartered completed its first cross-border blockchain payment. Meanwhile, KPMG has recently launched its own blockchain laboratories in Frankfurt in collaboration with software giant Microsoft and global brands such as IBM and MasterCard have started funding their own blockchain experiments. It seems that many of blockchain’s benefits are still being realised. “When you think of DLT as an architecture then the benefits become a lot clearer,” says Ng. “DLT offers a whole range of benefits congruent with goals of modern

organisation like near real-time processing, security, immutability and trust just to name a few. “If you think about traditional architecture, different participants keep their own records because they don’t necessarily trust other counterparties to maintain the transaction records for them, and there is typically also a need for a central trusted counterparty. “With blockchain architecture you get rid of the need for a trusted counterparty because everyone has a single version of the truth.” When it comes to its

use in the P2P sector, Cohen speculates that blockchain could be useful in monitoring payment flow within the larger platforms, or between a number of P2P lenders. “I think it represents an opportunity,” he says. “The investment banks are investing heavily in it – it’s an area that they’re really taking notice of. They will look at applying it to areas where they have a particular need, such as securities issuances, derivatives trading and trade finance.” As it stands, blockchain technology would only really be worth

FEATURE

WHAT IS BLOCKCHAIN?

Blockchain is essentially just a digital ledger of data. However, what makes it special is that it appears to be completely tamperproof, thereby creating a completely truthful centralised log of data built out of a series of ‘blocks’.

P2P has enough innovation “ and regulation to deal with and there are no benefits from using blockchain

”

considering in largescale transactions such as securitisations, which are still a relatively new phenomenon in the P2P sector. However, as the P2P market grows, the benefits of blockchain may become more and

more apparent. “Ultimately, I hope we’ll have a blockchain-based market, like an open stock market, that will allow us to trade publicly any kind of alternative assets,” says Marot. “Maybe someday...”

Since it is stored in the cloud, these data blocks can be accessed by anyone, anywhere, and on any device. This makes the technology ideal for the financial services industry, particularly when it comes to tracking multiple transactions. Every time a transaction takes place, a new ‘block’ of data is created and a new block is added every time the system is updated. The blocks are then stored in chronological order, so users can track the complete journey from creation to completion. Most importantly, once a block has been created, it cannot be changed. The blockchain code was invented in 2009 and it was initially seen as a piece of fringe technology known for its association with cryptocurrency Bitcoin. However, the word ‘blockchain’ is now used to describe any kind of cloud-based ledger which operates in blocks.

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