Interview with Matthew Powell, CFO of Lending Works

What is Lending Works about?

Lending Works is an online marketplace lending platform for unsecured personal loans. We offer extremely competitive lender returns and fixed rate, flexible loans up to £25,000 over 1 to 5 years.

What are the three main advantages for investors?

  1. Lender protection – our unique Lending Works Shield consists of a reserve fund to cover loan arrears and insurance to protect against the primary reasons for borrower defaults, including loss of employment, fraud and cybercrime. No other peer-to-peer lender offers this. In addition, our underwriting processes are extremely robust, resulting in a 0.00% arrears and default rate since launch
  2. Great returns – our lender returns are extremely competitive and are protected by the Lending Works Shield, so the rate you see is the rate you get
  3. Flexibility – lenders can access their funds early using our Quick Withdraw facility, or can automatically reinvest monthly repayments using Auto Lend

What are the three main advantages for borrowers?

  1. Low cost loans – our loans are offered at market leading rates. By directly connecting our customers and cutting out the bank, we’re able to cut down the cost of a loan significantly
  2. Simplicity – by utilising the latest technology and being an exclusively online platform, we’re able to pay out funds within one working day of completing the simple online application process
  3. Flexibility – borrowers can make overpayments or settle their loans early at any time, without charge

What ROI can investors expect?

Lenders can expect returns of around 4.1% over 3 years, up to 6.0% over 5 years. These rates are protected by the Lending Works Shield so there shouldn’t be a need for lenders to factor in bad debts.

How did you start Lending Works? Is the company funded with venture capital?

We started building Lending Works in 2012 and launched the platform in 2014. The idea was to create a simple and safe platform to enable ordinary consumers to get a fair deal. We tried to make lending and borrowing through Lending Works as simple as possible – most of our customers do not have the time or desire to actively monitor and manage their account. That’s why we opted to steer away from an auction-based or “market” model and introduced features like Auto Lend to automate the reinvestment process.

The company is funded primarily by angel investors. We’ve raised around £4m in funding to date which has enabled us to navigate the launch period successfully. We’re now focused on driving exponential growth through innovative partnerships and new loan origination channels.

Is the technical platform self-developed?

The technical platform is completely bespoke and was initially built by an external digital services agency. Since launch we’ve brought all development activity in-house which allows us to innovate quickly and to regularly release updates. We hired our first Head of Technology, Michael Raasch, in September. Michael has over 25 years’ experience working for large investment banks and has been fundamental in preparing our platform for large scale.

What was the greatest challenge so far in the course launching Lending Works?

There have been many challenges along the way, but the greatest in terms of management time and complexity has been creating the Lending Works Shield, specifically obtaining insurance cover for borrower defaults, fraud and cybercrime. This hasn’t previously been done and so it involved a lot of negotiations and opening ourselves up to a tremendous amount of due diligence. It was definitely worth the extra effort though, as we’re now able to offer market leading protection to our lenders.

Which marketing channels do you use to attract investors and borrowers? Can you share the acquisition costs per customer?

We use a number of different marketing channels to attract investors and borrowers. As the industry develops we expect to see many new innovative partnerships which will open up further loan origination channels and access to lending capital. There are a number of important developments currently taking place in the industry including an increasing demand from institutional investors and proposed ISA eligibility next year. This additional inflow of lending capital will enable the industry to continue to grow exponentially, and the marketing channels platforms use will need to adapt accordingly.

We can’t share with you our customer acquisition costs unfortunately as this is sensitive information.

The UK p2p lending market is very competitive. How do you see your position in this market?

The UK P2P lending market is extremely competitive and that can only be a good thing for the UK consumer. We set out to give consumers more choice in how they manage their finances, and so the recent influx of new entrants is welcomed. However, the regulation of the sector by the FCA and oversight by industry bodies like the P2PFA, of which Lending Works is a member, are important to ensure the industry continues to uphold its high standards as the market grows.

We see our position in this market as the safest peer-to-peer lender. We focus heavily on stringent underwriting processes and market leading lender protection to give our lenders peace of mind when lending their savings. We’ve maintained a 0.00% arrears and default rate since we launched in January 2014, and our Lending Works Shield provides a level of protection not offered by any of the other platforms.

With most retail investors coming from a background of relative inexperience in investing and managing investment risk, we wanted to offer a product which is simple and safe to use. It’s a big step for most consumers from saving money in an ISA or savings account to lending via a P2P platform, but we want to demonstrate that it’s actually a relatively low risk way of achieving inflation beating returns.

How do you expect the new ISA rules to impact the p2p lending market and your own business?

The announcement that P2P loans will soon be ISA-eligible was a watershed moment for the industry. The average cash ISA rate is currently around 1.5%, so the potential to earn up to 6.0% tax free from Lending Works is very exciting and will undoubtedly give a much needed boost to the ISA market.

There is still some work to be done to manage the practicalities such as allowing and managing transfers in and out and introducing a third type of ISA category, a P2P ISA. The proposal is currently in the consultation period, so we expect it to be at least Autumn 2015 before consumers will be able to lend through a P2P ISA.

The expected influx of new lenders is extremely exciting but will certainly be a challenge for platforms. It’s important that this process is managed well to ensure service quality remains high and lending rates are not suppressed by the additional supply of capital.

Do you plan to cooperate with institutional investors? In which way?

We expect to launch our platform for institutional investors in January 2015. This is important as it offers a smooth and predictable inflow of lending capital and opens up a number of new channels. Many see the introduction of institutional money into the industry as a negative thing, however provided platforms continue to focus on their retail investors there’s no reason why this should have a negative impact. I think this issue may be more prevalent with auction-based models where institutions have the potential to use algorithms to take the “best” loans before consumers. However, our model allows for institutional and retail investors to operate on a pari passu basis and we don’t intend for this to ever change.

We think working with both institutions and consumers is key to the sustained growth of our business and the industry in general.

Do you plan an international expansion? Will non-UK residents be able to use your platforms as investors?

We’ve not got any immediate plans for international expansion but acknowledge that there are plenty of opportunities. The recent emergence of a large number of new European platforms, for example, highlights that this innovative model can be applied almost anywhere and in any interest rate environment.

In order to lend through Lending Works you must have a UK bank account and all lenders are responsible for paying UK income tax on interest earned.

Where do you see Lending Works in 3 years?

We have ambitious growth plans, in terms of both new channels for lender and loan originations and releasing innovative new products. We’re also focusing on developing a number of strategic partnerships which will facilitate continued exponential growth. As an industry we’ve barely even scratched the surface of the wider market and I see no signs of the growth rate slowing down.

I’m confident that in 3 years’ time, general awareness of peer-to-peer lending will be significantly higher and many more consumers will feel confident about the risks and rewards involved. In addition, as the regulatory landscape continues to evolve this should further enhance consumer confidence in sector and enable it to move from “alternative” finance into the mainstream. thanks Matthew Powell for the interview.

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