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I am delighted to be joined on the show today once again by Rhydian Lewis CEO at Ratesetter to talk about the ultra-hot topic of provision funds in p2p/marketplace lending. Rhydian was on in the early days back in LFP019 in an episode talking about P2P beyond the metaphors. That’s a good theme for today on a narrower topic as all too often when one reads about provision funds its metaphorical.

In practice as with most/all of FS one really needs to get the metaphorical whiteboard out and draw some diagrams and a bit of arithmetic to make it real.

Lets provide some context first. Ratesetter was formed 7 yrs ago and has accumulated an amazing 300,000 customers with an amazing 250,000 on the platform right now and have lent an amazing £1.5bn with no lender ever losing a penny of interest or capital along the way.

Those are phenomenal achievements that very very very few Fintechs will ever manage to better.

But like growing up there are growth pains along the way. Ratesetter has been somewhat the P2P of choice for taking pot-shots at this year for the FT Alphaville column and the impressive Kadhim Shubber who seems to do more research than most. What are euphemistically described perhaps as missteps around self-investment of provision funds, not publishing future loan losses and rebasing of how the provision fund excess is calculated came in something of a flurry and even generous if sceptical folks like I started to raise an eyebrow.

But behind all this is the need to change. Did Ratesetter – or for that matter you and I – get everything right in 2009 (or for that matter every year since) or do they and we all need to keep changing in the light of experience and further thought?

Let’s briefly mention provision funds.

So briefly a soft-fail provision fund to use my terms is like the platform having a piggy bank into which it puts a few pence on every deal. If lenders loans are impaired that piggy bank is raided to subsidise them. But when it runs out the platform says “sorry guys no more funds to subsidise your loss, over to you”.

A hard fail model in contrast (which off the top of my head Ratesetter is the only big user of) when it runs out pools all investors assets together (to share the losses out). This is a big phase change – like going from water to ice. Its always been a concern of mine – if only as 30+ yrs in FS has shown me time and time again in different markets the impossible is always happening. No amount of whiteboard ink will ever save everyone in all circumstances.

So lets dive into all of this. An annus trickyus for Rhydian and colleagues and this important point about hard provision funds.

Plenty discussed on the show including: – the ups and downs of fate and surviving challenging times

– the value for a company of going through tough times together

– which part of a company journey is the easiest/hardest?

– the value of having focused on the retail customer (September’s figures were 98% retail-funded) – Ratesetter are possibly the UK Fintech with the most private customers

– ca. 40,000 investors, 210,000 borrowers and the role of the GiffGaff deal in this context

– how the GiffGaff customer journey works re GiffGaff branding and Ratesetter branding

– “credit should be bought not sold”

– how to survive challenging times as a business and as a person

– the value of small pivots in growing a business from startup to a quarter of a million customers and beyond

– Ratesetter’s attitude to criticism and adverse press coverage

– loan books and school years (see also Rupert Taylor’s presentation at Lendit 2016)

– “being a startup lending business is unbelievably perilous because you are prey to negative selection and it’s very difficult to fight into the lending market” … “with every year that goes by we are seeing better opportunities”

– the four main stakeholders that Ratesetter needs to balance the interests of – customers, staff, shareholders, and provision fund

– different pressures at different times of the curve re various stakeholders

– how the Ratesetter provision fund works at present

– smoothing and diversification via the provision fund; no complete elimination of risk but significant risk reduction (note also Rhydian’s “Cost of Certainty” talk at Lendit 2016)

– provision fund as enabling lending faster

– coverage ratio and new p2p language around coverage ratios – interest coverage (around 1.25x) and capital coverage (around 3x)

– the psychology of losing “money” (ie capital) versus a reduction in gain (diminished interest on the capital)

– Ratesetters new thinking about evolving their provision fund model to get away from the “binary” or “hard-fail” model to date

– where they are in their internal process about announcing all the details

– “not thinking aloud in public”; their changes in communications policy

– the P2P and Fintech community at large as a stakeholder in business models of individual firms

– the need for evolution in everyone’s models

– the business model is evolving but their mission has not – to give individual investors access to this important investment category with as much spreading and smoothing of risk as possible

– “who paid for the Financial crisis” – people and savers; the impact on savers of ultra-low and negative interest rates – how can you save up for anything when interest rates are negative?!

– the role of P2P in supporting the people in this context

– a large influx of money when base rates were cut

– “In a way P2P was seen as a solution to a lack of credit 7 years ago, I wonder whether in the next 3 or 4 years its going to be seen as a solution to a lack of income”

And much much more 🙂

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