Two years since its formation, peer-to-peer lending platform RateSetter is about to pass the £50m barrier in loans placed. Richard Brown speaks to COO and co-founder Peter Behrens and marketing executive Simon Hawtin about the market and the model of loans between individuals
Asked in October 2012 what to expect in the next eight years of car finance, the most positive discussion from the Motor Finance panel of lenders, brokers and dealers was peer-to-peer (P2P) lending.
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The P2P model matches money from savers looking for a potentially bank-beating return with borrowers after a competitive interest rate.
The three major companies in the market are Funding Circle, which sets up loans to SMEs, and RateSetter and Zopa, which provide personal loans. All three are web-based platforms for lending and together form the Peer to Peer Finance Association.
Almost half of RateSetter’s and Zopa’s books are taken up by loans for car purchases – 46% of RateSetter loans since its October 2010 launch and 47% of Zopa loans, year-to-October, 2012 and both companies are recording exponential growth. Zopa has arranged £250m of loans since 2005; while RateSetter passed the £40m total in late 2012 and has predicted another £10m by early 2013, according to Simon Hawtin, marketing executive at the company.
Additionally, the model and sector are relatively free of the regulatory fears and Payment Protection Insurance (PPI) claims – P2P lending doesn’t come with PPI – that are troubling the car finance sector.
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By GlobalDataP2P lending, particularly on cars, is, surmises Hawtin, "an interesting space at the moment."
Not least at RateSetter, which Peter Behrens, chief operating officer, estimates is "doing a bit over a million pounds a week at the moment", and where, in January, "normally these things get a bit busier".
Beyond that, the government has signalled its approval for the market by providing Zopa and Funding Circle with £30m (of the first £55m available) to lend under the Business Finance Partnership at a time when the car finance industry is calling for more state funds to be made available and not restricted to banks (as under the National Loans Guarantee Scheme). For Behrens, who co-founded RateSetter with Rhydian Lewis, the importance of the money lays in "the government’s endorsement of peer-to-peer
lending".
Platform for lending
P2P lenders "sit on both sides of the loan," explains Behrens. "We provide a conventional unsecured loan and, on the other side, an opportunity for people to save money effectively and get a better return on it than they would with a bank."
Compared to conventional banks "in RateSetter’s world you lend your money directly to somebody else," says Behrens. "We facilitate that. We offer a platform that allows people to lend money to each other."
Although there is little difference on the borrowing side of their businesses between Zopa and RateSetter beyond term lengths, each company operates a different model on the lending side.
Zopa categorises borrowers by risk and asks the lender what level of risk they are prepared to take, with a differentiated rate of return available.
By latest company estimates, the average fixed-rate of return offered by Zopa was 5.4% after charges and defaults. Borrowers pay a fee fixed by the amount and length of the loan and no single borrower is loaned more than £10 from any one lender, diluting the risk and keeping default rates at around 1% on unsecured loans, according to the company.
"At RateSetter we do it a bit differently and the lenders all get one return," says Behrens. "The borrowers pay a premium based on how risky we perceive them to be. That premium goes into a pot we hold on behalf of our lenders called the provision fund. If there is a loan that goes bad, lenders can make a claim for that pot of money. No lender has ever lost a penny on RateSetter."
For a provider so engaged with individual customers on either side of its proposition, Behrens explains customer support and flexibility of product are paramount.
"De Facto – an independent consumer money commentary provider – did a big review of all loan products in the market, ignoring rate. They stamped our loans with a five-star stamp. You can repay them early, you can move the direct debit dates, all very customer-friendly.
"We set ourselves up recently, with modern systems, which enable us to deliver that level of customer service. In this relationship, there are two things: The customer has got a loan and has got a car and is probably more interested in what service he gets when his clutch breaks than being able to move his direct debit. But it’s helpful if, in the background, we are supportive, helpful and easy to deal with.
"The other point is we keep an eye on the source of money and we’ve very competitively priced."
The ability to compete on price, says Behrens, also allows RateSetter to function predominantly in the prime market, where they are "pretty keen to stay", rather than explore non-prime.
"Our default rate is 0.3%," explains Hawtin.
"Which is something we try to protect," adds Behrens.
The immediate future of such a model, according to Behrens, is the consolidation of its popularity: "We are not necessarily offering up loans to a vastly new market. The people who borrow from RateSetter can borrow through the high street banks, but we’re giving them a much better return, which means money is cheaper, which means people can afford to spend more on their car.
"Zopa and RateSetter have over 1% of the consumer loans market. We’d obviously like to grow that number as much as we can."
Part of that growth will include opening up the RateSetter product to car dealers, the appeal of which, believes Behrens is the "painless" in-house customer process system.
"We’ve spoken to a few dealers," he says, arranged by Hawtin. "We’re trying to talk to people, show them what we can do and integrate some systems.
"46% of the loans we do here are for people looking to buy cars," explains Behrens. "That’s proportionate with the quantum they make up of normal unsecured loans. We replicate the loans market as is.
"Now, by definition, those are second-hand cars, not people going into Volkswagen to get a brand new car, because in-house finance is a difficult thing to compete with. The point about new cars is it just feels, instinctively, if you’re buying from a dealer, that level of dealer finance is incredibly competitive."
Franchised retailers aside, which dealers RateSetter will approach comes down to a "question of scale".
The company has started "small", rather than with a large, franchised retail group, says Hawtin, who agrees there is more room to do business in used cars. He aims to "test-bed with a small dealership group and then see where we go".
Withdrawal of lenders
As with many new entrants or surviving players in the car finance sector, the opportunity, says Behrens, lies in the withdrawal of many lenders from the market, which has massively reduced the amount of money available to customers.
The UK personal finance sector is a different world from 2005, "when the banks worked pretty well, lending money to anybody.
"They were paying savers quite good rates. On the banking side of it, the spread wasn’t really there. It was hard to be competitive.
"In 2005, the thought of lending a stranger £5,000 over the internet was extraordinary. It’s still extraordinary today but, with the general comfort with the internet as the mechanism to do it, people are much happier."
Today, considering the pullout of ING Lease UK, which has left many brokers looking for funding sources, Behrens says RateSetter’s "very slick process" for funding appeals to brokers, as much as it does for dealers, without conflicting with their work.
"It can sit very nicely alongside," he says. "I’m not trying to do them out of their job."
Behrens adds it is "not a very difficult thing" to get a broker to take a chance with P2P lending to get money into dealerships.
"I’m very happy to offer my product through brokers. I deal with all sorts of brokers all over the personal loan market. Frankly, they are very easy to deal with."
Regarding regulation, Behrens explains the founding of the Peer to Peer Finance Association by RateSetter, Zopa and Funding Circle was in response to "a number of issues around the industry" and in favour of government regulation.
"First, it’s not entirely obvious to someone who wants to set up a peer-to-peer lender how to do so and the three of us spent quite a lot of time, effort and money working it out," says Behrens. "If you put out a clear framework, that will invite other people to take it on, which is a good thing because it’s a sensible way of doing things; the more people do it, the better.
"Secondly, the big risk to this industry is if someone turns up, makes a big fanfare, says they’ve got loads of cash, gets lots of lender money in and then runs off to Honolulu with it. Hopefully a regulator should ensure that can’t happen."
To Behrens’ mind Zopa, RateSetter and Funding Circle have approached lending "in a very sensible way", a reputation each company wishes to protect by proving the credibility of the market and "proving to people that we are serious".
Part of this has been the appointment of Christine Farnish as chairwoman of the Association in mid-December. Farnish has chaired consumer rights campaign group Consumer Focus since 2010 and the Audit and Risk Committee since 2007, and her background includes senior positions at Barclays and the National Association of Pension Funds, and as consumer director at the Financial Services Authority (FSA). Farnish "is going to help us take the industry toward regulation over the next 15 months", says Behrens. Hawtin agrees the appointment "shows we’ve got sufficient interest to attract good people to our cause."
Aside from the worries of an unregulated company running off with lenders’ money, Behrens does not foresee any regulatory headaches akin to those being felt in the heavily-intermediated car finance market.
"The truth is we are very transparent," he says. "We make just about every possible bit of data we know about our business available to our customers.
"The regulators can make our lives difficult and can certainly make things expensive, but there’s nothing we are losing sleep over. We just want them to put in place some sensible rules. The big risk to our customers is that we disappear as a platform. If you’re a lender, the last thing you want is to lend to hundreds of contracts out to people all over the country – you don’t know who they are, you don’t know what’s going on. It’s just practical protection for the consumer.
"One of the messages the Treasury and the FSA delivered was that this industry is enhancing competition and it’s good for the consumer. Since peer-to-peer launched, there have been four complaints and not one of them has been upheld. This is not an industry that’s being bashed by its customers. Hopefully the FSA will see that."
richard.brown@timetric.com
