P2P (online lending and borrowing) is plagued by media (old and new) descriptions in terms of what are often just metaphors – “P2P disintermediates banks”, “P2P directly connects borrowers and lenders” et al.
Furthermore with a number of different models emerging (which isn’t always obvious to the “paying public”) it gets less relevant to say “a P2P does X” as some of them might “do X” and some of them might not.
Two key models are the more ~marketplace one (eg Lendinvest in LFP013) and the Ratesetter model which is a more savings-like ~fund (the FCA has kittens with those words but that’s their problem not mine :-D), stable return backed by a provision fund.
In this special (ie super-long) episode we move “beyond the metaphors” to discussing what actually happens in P2P. In FS that means getting into payment flows, bank accounts, legal contracts and the like. The kind of thing that has been drawn on whiteboards in the City ever since they existed (funnily enough I don’t recall blackboards being there before whiteboards?!).
As an example of where metaphors are misleading, despite reading masses about Lending Club pre IPO, it was only this year that I stumbled on the fact that Lending Club doesn’t do the lending! [The actual loan is made by Webbank headquartered in Salt Lake City (and then assigned)].
Rhydian Lewis is a real star guest to discuss these issues with, as, as he explains, his first scribblings on P2P predate P2P itself by several years so he was a genuine fore-runner. He worked at Betfair (a P2P betting exchange) and as a Corporate Financier at Lazard so has real experience of tech P2Ps and hardcore FS apart from also having co-founded Ratesetter, invented the idea of a provision fund in P2P and having taken Ratesetter from a startup to the largest P2P in terms of monthly originations at present.
We discuss a whole variety of topics:
– Rhydian’s background, what lead him to thinking of doing P2P, and how Ratesetter started
– they are driven by doing something they genuinely see as good [for society as a whole]
– the essence of P2P as being that the ultimate risk lies with the lender [unlike with a bank]
– banks’ interest in keeping money in bank accounts (which isn’t threatened even slightly by P2P which “just” (at this level) is involved in a chain of transfers between bank accounts)
– Ratesetter’s system is anonymised (ie you do not know who you lend money to), potentially [in general] this might be de-anonymised if the platform fails [although in Ratesetter’s case it would not be]
– FCA requirement of a run-off plan, backup-servicers as a “passing the buck” in Rhydian’s view who prefers the more “winding down/run-off plan”; a number of models out there in the market about what is planned for these circumstances
– P2P’s inherent strengths as it does not give guarantees or safety – it’s all done on a “best efforts” basis – thus is a more manageable arrangement [cf banking where regulators are trying to make it “safe” – which ends up being incredibly costly]. “Ratesetter focuses on value not safety”
– putting the above into context so far their “best-efforts” basis has shown brilliant returns – no-one has lost a penny
– contracts – comparing buying an equity, depositing money in a bank or lending/borrowing through P2P
– their motivation being to focus on the rate setting process (hence the name…) – interest rates are normally being set by markets to which consumers have no direct access; the motivation in Ratesetter was to create a market between people where people set the rates
– this fundamentally changes the relationship with the customers. Banks on the one hand just tell their customers what the new rates are. On the other hand P2P are a marketplace where the players set the rates
– it was this motivation which drove the provision fund – not a desire to be different, nor to create a ~savings product, nor for tax reasons – but to “take credit out of the equation” so that the platform would focus on being an order-driven exchange to set the rate (&how that works)
– the role of game theory, tactics/strategy, and potentially consultants/fund managers in achieving the best rate on the platform [by not hitting the “whatever” rate button :-)]
– how P2P provision fund’s are structured – trusts (Ratesetter) or companies (Wellesley) – and issues around these – who benefits, who owns, how it grows, and the possibility one day that they (or a large surplus) might appeal to private-equity asset-stripping/demutualisation
– the three ways of measuring size – volumes since inception (industry loves, I don’t lol), monthly originations (as a measure of which firm is the one making waves) and the outstanding loan book size)
– Ratesetter’s rapid growth – more than doubling every year, grew 30% in January, just passed £0.5bn in cumulative lending
– Ratesetter Australia
– “Brand comes with trust and there’s no short-circuiting that” – a refreshing view in the modern world of hype and PR.
In rounding up I point out that although we have got into quite some detail it’s still at a relatively high level. All too often in my experience – maybe due to excessively metaphorical conversations – folks wrongly believe that P2P is “simple”.
Talented individuals make sports look easy and good businesses make good business look easy. However – and to all their credit – the leading players in this new industry realise all to well that there is a lot of work and thought that goes behind the scenes in making a simple proposition for the client.