Are Institutional Investors Good or Bad for P2P Lending?

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In the UK there has been a notable shift in the P2P Lending model over the last year towards increased involvement from institutional investors. The UK market is sometimes said to be two years behind the US P2P market, and this statement certainly holds true when it comes to attracting funds from this class of investor. Indeed, in the US it is estimated that around 80% of loans made through the two largest platforms, Lending Club and Prosper, are currently taken by institutional investors replacing the retail lenders that previously dominated the space.

There are two principal explanations for this shift beginning to occur in the UK: firstly, institutions are seeking access to new asset classes, and secondly, institutions see in P2P a scalable opportunity. Return is also key. With record low interest rates, volatile stock markets, and low bond yields, the P2P lending space offers investors the chance to earn considerably better returns without a proportionate increase in risk – an undeniable positive.

Thus far there have already been some high profile institutional involvements. In October, Eaglewood Capital finalized a $75 million securitization of P2P loans that were originated by Lending Club.  In addition to this, Funding Circle has  done a deal with KLS Diversified Asset Management, a US fixed income fund, to lend £132 million to UK businesses. This is the first time a US investment firm has lent money to British business on a P2P platform, further proof that the UK lending model is following the trends in the US but also that institutional money in the UK is not solely limited to UK institutions.

There is an obvious argument that institutional involvement could signify the end of ‘P2P’ and the ‘democratisation of finance,’ but in the author’s opinion this is simply not the case. Firstly, institutional involvement signifies an extra layer of due diligence, a form of due diligence that individuals are realistically unlikely to have available. This allows individuals to follow the smart money. Furthermore, the weight of additional institutional capital allows for larger loans to be funded over platforms, allowing more businesses to gain access to the financing they are sorely lacking. Lastly, it allows platforms to scale and reach targets at a far superior rate to relying on retail investment alone. In short, everyone’s a winner.

So whilst institutional money may currently represent only 30% of P2P funds in the UK, I expect that figure to be much, much higher in 2015.

Using unconventional data points to augment risk assessment for consumer lending (P2PL)

[avatar user=”Mark Petty” /]

Credit risk modelling is a pervasive and necessary tool used in lending to identity the likely credit worthiness of a Borrower.

Traditional credit agencies rely on historical data to predict the propensity to default over the length of the loan. The data points utilised for consumer credit risk have largely gone unchanged in the last few decades; defaults, credit history and transaction history such as phone, utilities and credit card repayments.

There are clear gaps in this current methodology. Timeliness of data one, but also a gap for the millions of consumers for whom credit agencies do not hold data on.

To have a truly fit-for-purpose risk model for P2P lending there is a need to draw on additional non-traditional datasets for proper assessment. Aggregation of social media, behavioural and big data analysis is key. The traditional credit agencies are talking about it, but like banks they are too slow to move and don’t have the expertise to innovate at the current time.

As we lead our lives online, the opportunities to augment traditional credit reporting with non-traditional sources increases. Everywhere we go we leave a footprint. Our connections on social media and the history of the products we buy can be combined to construct a picture of who we are and our likelihood to payback a loan.

ZestFinance and Kreditech are a part of the new wave of credit agency (and further proof that financial services is being disrupted from all angles). Both utilise big data analytical techniques to mine social media networks and ecommerce transactions.  Kreditech claim to analyse 15,000 individual dynamic data points, contrast that with traditional credit bureaus who have at most 10 to 20 variables.

 

A Hungry Crowd

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With 80% of food sales going through 5 major retailers you could be forgiven for thinking that this oligopoly is irreversible, however there has been a recent, dramatic rise in the popularity of farmers markets with UK consumers seemingly showing a keen interest in sourcing and buying their food directly from producers.

Farmdrop, a click and collect farmers market, was founded in 2012 with the aim of providing a space where people who make or grow food can sell it direct. One of the biggest problems faced by farmers in the UK is that by selling their produce to major retailers they are making significantly lower profit than if they were to sell it directly. One of the co-founders Ben Pugh reaffirms this by stating that Farmdrop allows for suppliers to keep ‘80% of the retail price of their goods, rather than the 50% they might make through traditional retailers’.

Farmdrop have turned to equity Crowdfunding in a bid to expand their number of ‘hubs’ across the UK from 5 to 60 with an end goal of 400 by 2017. They reached their £400,000 target within just eight days and have extended the campaign, it has currently raised £473,250 with 42 days left.

In what has been one of the most successful Crowdfunding campaigns in the UK to date it appears the Crowd are backing this innovative new approach to buying and selling food.