German P2P Lending Market – Short News

We last reported on Lendico refocusing on SME loans instead of consumer loans in Germany. Sinces then there is more negative news. Sources say that Lendico was in talks with Spanish bank BBVA, but failed to close a financing deal. In December several employees left the company. Lendico said that these were normal fluctation and that the Lendico group has more than 100 employees.

Documents accessed by show that the largest (by loan volume) German p2p lending marketplace Auxmoney made an operating loss of 13.1 million EUR in the year 2015 (compared to 8.48M loss in 2014). This was before receiving Series D funding in early 2016.

Funding Circle CE, Berlin, the German division of Funding Circle closed 2015 with an operating loss of 9.45 million EUR (compared to 2.83M loss in 2014).

Germany seems to be a very hard market for p2p lending companies to crack. Interest rate levels for consumer loans are very low compared to other markets. banks are competitive. And there is no significant amount of credit card debt that can be refinanced. P2P Lending marketplaces cannot offer better interest rates, they need to find other competitive advantages. And customer acquistion costs to win borrowers through online marketing channels are high in Germany.

While Lendico never published monthly origination volumes, Auxmoney and Funding Circle CE stopped making monthly figures available early in 2016. The latest publicly accessable figures were 10.6 million EUR new loan originations for Auxmoney in January 2016 (ranking in Top 6 of Europe’s marketplaces) and 0.8 million EUR for Funding Circle CE in June 2016.

German retail investor perception sentiment towards Lendico and Funding Circle CE is critical. Investors discuss whether Lendico is still active developing the business and rant (1,2) about information quality of the Funding Circle CE interface. Another sumup by a German investor on Funding Circle CE.

Funding Circle has said that it will use part of the funds of the recent 100M US$ round to consolidate its position. It will be interesting to see if this results in higher activity in Germany as they announced to concentrate their continental focus on the Netherlands and Germany while stopping to issue new loans in Spain.

Marketplaces Step Up Incentives for Investors

Currently there is an increase of promotions by p2p lending marketplaces in order to acquire and activate retail investors. Cashback offers are more frequent and Funding Circle is giving away iPads to investors that will invest at least 20,000 GBP during the Funding Circle spring promotion. Investors welcome these added benefits, but for marketplaces it is a fine line to walk. They want to grow originations, but risk that investors will expect getting extras and might hold back further investments until the next offer is made.

Funding Circle Spring Promotion
(Image source: Funding Circle)

LendingRobot Adds Functionality to Invest into FundingCircle US loans

3rd party service LendingRobot today announces a partnership with Funding Circle in the United States, expanding the reach of LendingRobot’s automated investment technology beyond consumer loans and into small business lending.

Through the integration, individual investors using LendingRobot can set automated investment strategies for Funding Circle’s marketplace based on an extensive set of loan filtering criteria, and leverage the unified platform to manage their investments across multiple marketplaces, including Funding Circle.

“Introducing Funding Circle to the LendingRobot family of platforms demonstrates that our algorithmic investment strategies are extensible beyond consumer credit,” said LendingRobot CEO Emmanuel Marot. “The growth of peer lending as an investment vehicle is naturally encouraging an increase in the number and size of focused, vertical marketplaces. What we are building with this partnership is a unified view of all the major aspects of peer lending for investors, …”. Continue reading

Funding Circle UK Moves To Fixed Rates, Ditches Auctions

Funding Circle LogoBritish p2p lending marketplace Funding Circle introduces a new model today. All new loans will be issued at fixed interest rates set by Funding Circle. Coming right after Funding Circle’s fifth anniversary, and 792 million GBP originated in loans to SMEs, the step to discontinue auctions is a major change in the way the marketplace operates.

Spokesman David de Koning told that there were major drawbacks associated with the auction model for borrowers as well as lenders. Borrowers lacked certainty of the final interest rate until the auction period was over which led to some of them cancelling their loan application. Investors on the other hand experienced cash drag and sometimes had to make multiple bids to ensure they participate in the loan they wanted.

Funding Circle new rates

Under the new model Funding Circle will set the interest rate based on risk band and loan term. There will be 3 different rates for each risk bank. De Koning pointed out that the introduced model is not completly new for Funding Circle, as Funding Circle did already use fixed rates on property loans and on the US market of Funding Circle. Asked whether he expects loans to close instantly as demand could be higher than loan supply, he said he could certainly see loans to close quicker than before. The long term goal envisioned is that in future borrowers may pre-approve a loan before it is listed and it could close instantly once filled. Continue reading

Will Funding Circle Expand Into Europe?

Note: The following is a synopsis from an Funding Circle investor event in London yesterday. I did not attend, therefore it is based on notes that attending investors have published.* I selected only some aspects from these notes, that I found interesting, so the following probably omits many topics from the meeting and is by no means complete.

Funding Circle confirmed that it has been investing own money (approx. 760K GBP) in loans on the platform. So far none of these loans have been sold on the secondary market.
Property loans were a new area for Funding Circle. To get it started Funding Circle used cash backs to incentivise investors. So far institutional investors have not invested into the property loans but this is likely to change soon.

Funding Circle sees retail and institutional investors as equally important for their lender mix in the future. Cashbacks are expected to be reduced in future as they were more important when new markets were introduced than now.

Funding Circle is working on improvements on the website and in communication to better meet the expectations of investors. The risk model is performing increasingly well over time. They also capture and monitor data about borrowers that they reject, watching for CCJs and other credit events.  This has enabled them to develop a more complete model, and ultimately enabled them to launch the E risk band.  E borrowers are people that they would previously have had to reject, but now they understand them well enough to feel they can accurately model the default risk.
Personal Guarantees are factored in to the risk banding process, and also considered in the manual underwriting stage; they do make an assessment of the “value” of the PG, but it’s aggregated amongst lots of other stats to produce an overall ‘score’.

In collections Funding Circle has  reduced their late rate (percentage of loans making late repayments) from 1.4% to 0.7% since they brought the function in house.
The recovery rate is currently at 20p/£1, but this is skewed by the vast volume of loans being made; Funding Circle expect this would be at c. 43p/£1 if the loan book was frozen.

Funding Circle produced a tool, for MPs, prior to the 2015 election, to show what businesses in what constituencies were borrowing what, from whom (and presumably, by extension, risk bandings etc).  This tool will be made available to investors via the Funding Circle website soon. Continue reading

Sage Partners with Funding Circle and MarketInvoice

Sage, the business software and services provider, announced two partnerships that will help SMEs unlock the UK’s growing alternative finance industry, which was worth 1.74 billion GBP in 2014.

Integrating with one of Europe’s peer-to-peer business lenders for short term finance, MarketInvoice, Sage’s flagship small business accounting package – Sage 50 Accounts – now enables small businesses across the UK and Ireland to apply for business-critical funds more quickly and easily than ever before.

Working with Funding Circle, an marketplace for business loans, Sage aims to help even more businesses across the country understand how they can borrow all important growth capital between 5,000 GBP and 1 million GBP (and up to 3 million GBP for property finance) in days not months.

‘Sage has been at the forefront of payment and funding innovation for years, and alternative finance is no exception,’ said Lee Perkins, EVP and UKI Managing Director for Sage Group plc. ‘Sage Pay already provides a key piece of the business growth puzzle, and when it comes to small business accounting, Sage 50 Accounts offers the deepest and broadest hybrid accounting capabilities on the market. By partnering with MarketInvoice and Funding Circle, we’re giving Small & Medium Businesses in the UK the ability to swiftly and easily apply for additional funding to support their business development and growth.”

Lack of finance remains a critical issue for UK companies, with almost 40 per cent stating it holds them back from growing, according to UK Bond Network. Whether they need to invest in stock, new premises, product development, or even cover day-to-day costs, alternative finance can provide faster, more convenient lending than traditional sources. Marketplace lending platforms have provided over 2.1bn GBP  in funds to UK small businesses in recent years.

James Meekings, co-founder of Funding Circle, said: ‘The Funding Circle marketplace is currently the fifth largest net lender to small businesses in the UK, in just under five years. But there’s still a long way to go – many small business owners remain unaware of the choice they now have when looking for finance. Partnering with Sage will allow us to grow awareness and trust, bringing more competition and efficiency to the small business lending market.’ Continue reading

Queue Up for P2P Lending!

When was the last time you stood in a long line outside your bank branch, patiently waiting to deposit money into your savings account? Imagining a scene like that seems ridiculous at a time with near-zero interest rates in an increasingly large number of developed countries.

But there where you would least expect it, in the Fintech world of fast-moving bits, some startups actually are imposing measures to throttle influx of investor money in order to balance it with borrower demand. Welcome to p2p lending (short for peer-to-peer lending). The sector is experiencing tremendous growth rates. With attractive yields for investors some platforms struggle to acquire new borrowers fast enough for loan demand to match the ever-rising available investor demand.

One challenging factor is deeply ingrained in the business model of p2p lending marketplaces: once a new investor is onboarded and found the product satisfactory, he is most likely to stay a customer for years to come and reinvest repayments received and maybe the interest also. On the other hand the majority of borrowers are one-time customers. They take out a loan typically just once. While it may take years for the borrower to repay that loan, in most instances there is no repeat business for the marketplaces. So the marketplaces have to constantly fire on all marketing cylinders to win new borrowers in order to keep up and grow loan origination volume.

This has sparked some outside of the box thinking, e.g. the partnership of Ratesetter with CommuterClub to win their loan volume, which is in fact mostly repeat business.

Winning investors has been relatively easy for many of the p2p lending services in the recent past. Investors are attracted typically through press articles or word of mouth. One UK CEO told me he never spent a marketing penny ever to acquire investors.

But what happens on the marketplace, when there are so many investors waiting to invest their money in loans, but loans are in short supply?

  • If the marketplace does nothing or little to steer it, then those investors that react the fastest, when new loans are available, will be able to bid and invest their money. This is the situation e.g. on Prosper, Lending Club and Saving Stream.
  • The marketplace has some kind of queuing mechanism. This is typically coupled with an auto-bid functionality. Examples of this are Zopa, Ratesetter and Bondora.
  • The investors are competing during an auction period by underbidding each other through lower interest rates. Examples of p2p lending services with this model are Funding Circle, Rebuilding Society and Investly.
  • The marketplace can lower overall interest rates to attract more borrowers while the resulting lower yields slow investor money influx.

The UK p2p lending sector is eagerly awaiting the sector to become eligible for the new ISA wrapper. Inclusion into the popular tax-efficient wrapper will attract an avalanche of new investor money to the platforms.

“That’s going to be a challenge for the industry,” said Giles Andrews, CEO of Zopa. “Once the dates are worked out, the industry will need to plan for that together, and we may have to do something we have never done before, which is to limit the supply of money. It’s not good to have people’s money lying around [awaiting new borrowers] or to lower standards of borrowers.”[1]

So there is some speculation that UK p2p lending services could impose temporary limits on new investments.

The investor viewpoint

The aim of the investor is to lend the deposited money easy and speedy into those loans that match his selected criteria/risk appetite. Idle cash earns no interest and will impact yields achieved (aka cash drag).

For the retail investor none of the above mentioned mechanisms are ideal. The “fastest bidder wins” scenario means he would either have to sit in front of the computer most of the time or be lucky to be logged in just as new loans arrive. The queuing mechanisms are disliked as they can prove to be very slow in lending out the funds and can be perceived as nontransparent (see the lengthy and numerous forum discussions on the Zopa queuing mechanism). Underbidding in auctions does provide the chance to lend fast, but at the risk of setting the interest rate too low and this requires a strategy and can also be time consuming. Continue reading

How I Explored P2P Lending – My Review Part II

This is part II of a guest post by British investor ‘GSV3Miac’. Read part I first.

Most of my concerns about P2P lending revolve around its relative immaturity. Even ZOPA, the oldest in the UK, has only been around 10 year or so, and have changed ‘just about everything’ at least twice. Funding Circle (“FC”)have 3-4 years history, but there have been no two years where the business has actually been stable (maximum loan sizes, loan terms, Institutional participation, etc. have all changed pretty much continually over the period I’ve been investing). How well the companies, and their borrowers, would survive a real recession, can only be guessed at.

What do I actually invest in? Well practically anything if the rate looks good. My ‘core holding’ is in RS, but there is nearly as much spread across the P2B platforms. For extra P2P related risk (and maybe reward) I also signed up to invest in the Assetz and Commuter Club capital raises (via SEEDRS). With EIS investments some of the money at risk is renated tax, which you had a 100% certainty of losing to the government anyway.

I do not plan to hold most of my investments (particularly in FC) for the full 5 years. After a few months the financial data is well out of date (much of it is already out of date when the loan is approved!) and unless you want to spend time checking how the company is doing, it is easier to sell the loans on and start anew.

Similarly if rates start to move dramatically, it’s time to ‘flip’ or ‘churn’ .. selling a 7% loan part when rates move to 9% is possible, but might sting a bit. Selling a 7% loan part when rates have moved to 14% is going to hurt a lot, or might be completely impossible. If rates move the other way, selling a 7% loan part when average rates are 6% is not only easy, it may be profitable (assuming the platform allows marking up). You might wind up with un-invested funds, but as someone succinctly put it on the P2P forum, ‘un-invested is a lot less painful than lost’.

The future looks equally interesting .. we are promised P2P investments within an ISA (do NOT hold your breath, this seems to be moving at a glacial pace so far), which could result in a ‘wall of money’ arriving on the scene. We are promised P2P losses to be tax deductible (against income, rather than capital gains), which has an impact on the worth of a protection fund. We will inevitably see some new entrants appear as the P2P area grows and become more attractive (Hargreaves Lansdown, a very large fund management player, has already indicated they might get involved, I believe). We will equally inevitably see some more of the current players merge or vanish, and many of the loans default.

As I may have mentioned a couple of times, nothing has been very stable so far .. most of the platforms are still ‘feeling their way’ with immature software (this is polite-speak for ‘bugs’), and business models/systems which are still evolving. The basic P2P premise of connecting people with money with people who want it, without too much activity in the middle, does not appear to scale too well when the number of each side get big (a million people bidding to fund a thousand loans each day is not something to contemplate lightly). Platforms need to grow to survive and they need to grow in balance – if they double the number of lenders, they need twice as many willing borrowers, and vice versa .. Asymmetrical growth just annoys whoever is on the surplus side, distorts the rates, and results in no growth at all – you need both a lender and a borrower to have any business. It is obvious, but very hard to manage. Continue reading

How I Selected My Preferred P2P Lending Marketplaces – Part I

This is part I of a guest post by British investor ‘Pete’.

Perhaps an introduction is the best way of starting this blog post since it should explain my reasons and approach to Peer to Peer (P2P) and Peer to Business (P2B) lending.

I am a UK based independent professional engineer. An engineer in my discipline requires a love of detail, data and spreadsheets and being independent it is required that I run my own company so I understand basic accounting and number/data manipulation.

So why do I invest in P2P and P2B? In the past I have had Pension funds raided, Investment funds loosing capital due to stock market losses and fees, a mortgage endowment policy returning 1.9% over 25 years when a simple cash investment returned +9%, shares devalued by the UK government who then bought them out at the devalued rate … a long list of ‘professionally’ managed schemes that lost my money. With P2P and P2B I am in control, I either sink or swim based on my decisions.

I started lending at the start of 2012 with Zopa and to a lesser degree with Ratesetter but not before I had read as much as I could find regarding P2P and the various business models. Using on-line resources research into Company and Directors ‘histories’ followed, a process I continue to use before I start investing with a new platform. Risk and Taxation were the next topics I looked into.

Whilst projected default rates were available on  Zopa I took a pessimistic view and anticipated a higher rate of loss when I put together my first spreadsheet to log my transactions and real rate of return (I mainly use Excel with the XIRR function). My aim with Zopa was to diversify as quickly as possible so I quickly put together a large number of small loans whilst ensuring that I didn’t have ‘dead money’ waiting to be lent out. This strategy worked and my losses have so far turned out to be below the Zopa projected level. In recent years Zopa have changed the way monies are lent out and introduced a provision fund to cover bad debts (Ratesetter have always had a fund) and at the same time investors rates dropped (Zopa dictated the rate at which money was lent) so I decided with regret that Zopa was no longer for me and started to withdraw monies as they became available, a process that will continue for some years since I am still happy with the return from my remaining loans.

In the meantime my Ratesetter account quietly built up (the power of compounding interest) and I had started investing in Funding Circle (Sept 2012). I quickly found out that due diligence was required when investing in listed loans (I do not like automatic bidders, I will always manually invest/re-invest) and whilst time consuming it gives some reassurance that you are not investing blind. Whilst the returns I received (and still receive) from Funding Circle are above those I receive from Zopa and Ratesetter I have found the time taken checking companies can be disproportionate to the return if small loans are made. In spite of due diligence the defaults in my experience are higher and coupled with the current UK taxation system for individuals, defaults can hit your rate of return in a disproportionate way.*

It is for these reasons that I have in the last year started withdrawing cash from Funding Circle in the same manner I am taking with Zopa. In the meantime my Ratesetter account continued to build. Continue reading

Victory Park Capital will invest 420M in P2P Lending Loans on Funding Circle USA

fundingcircle-logo-2012US asset manager Victory Park Capital will invest 420 million US$ over the course of the next 3 years in p2p loans to SMEs in the US via p2p lending marketplace Funding Circle USA. This agreement follows an earlier deal where Victory Park Capital agreed to lend 150 million GBP via Assetz Capital over the next five years.

With a single institutional investor planning to fund these volumes, these are staggering numbers.