Fintech lenders are “absolutely” revolutionising credit underwriting, says MarketInvoice CEO
MarketInvoice boss Anil Stocker talks credit, performance and customer retention.
MarketInvoice is a bit of an odd fit within the UK’s retail-oriented peer-to-peer lending sector, despite a well-earned reputation as one of its leading lights. Firstly, it’s very much a marketplace lender – as opposed to a “peer-to-peer” – despite being a long-serving member of the Peer-to-Peer Finance Association. Its investors are exclusively high net worth individuals and institutions. There is no retail money involved.
Furthermore, selective invoice finance as a product lies towards the more unusual end of the spectrum of assets that are encapsulated by the marketplace lending sector. Just ask the guys at AltFi Data. Comparing the track record of MarketInvoice’s performance as a lender on a like-for-like basis with that of Zopa, RateSetter and Funding Circle has been no easy task. Simply put: MarketInvoice is a different kettle of fish.
This is not to say, however, that the platform is not deserving of its status as a key player within the UK’s alternative finance industry. The firm grew rapidly in 2016, recently passing the £1bn mark in invoices financed, while also clinching a £7.2m equity investment, in a round led by Polish private equity firm MCI Capital.
I caught up with CEO Anil Stocker and head of investors Aman Mehra earlier this week for a wide-ranging interview on all things MarketInvoice.
Stocker began the interview by rubbishing the notion that 2016 had been a tough year. “There were specific control problems within Lending Club,” he said, referring to the events which led to the dismissal of Renaud Laplanche in May. “There were certain things that happened that shouldn’t have happened. But that doesn’t mean the whole model is broken.”
Stocker went on to argue in favour of the notion that the UK’s marketplace lenders showed themselves to be well-insulated from the turmoil that unfolded in the US.
“If you look at the year: platforms have raised money, platforms have continued to grow, there have been a couple of successful securitisations, new investors have come into the market,” he said. “There was almost too much hype before. In some ways having a more measured approach is good for the industry.”
MarketInvoice has always been one of the more interesting case studies for those interested in credit assessment. The specificity, the high level of automation and the short-term nature of the product allows the company to get creative in assessing creditworthiness in ways that more vanilla lenders cannot. It’s unsurprising, then, that where most alternative lenders would say they’re refining the credit process, Stocker fancies that MarketInvoice is revolutionising it.
“Absolutely – there’s no doubt about it,” he said. “What we’re doing in underwriting is very different from what the banks are doing. We’re able to deliver decisions really fast – what we believe are superior decisions.”
Stocker described the underwriting of mainstream banks as tiresome and overly manual in relation to the seamless, technology-driven assessments of MarketInvoice and other fintechs.
“What we and others have done means that when an application comes in, we’re able to auto-populate a credit score – our own credit score, pulling in credit bureau data, companies house, legal gazette, information that the customer has inputted through the application form, aggregate it all into one form, run it through some decisions. And then a human still checks it – it’s not simply a case of computer says yes or no – but we’re able to deliver that result in a couple of hours.”
He conceded that MarketInvoice takes some of the same data that the banks take, but said that MarketInvoice is using “a bigger data set” overall. Examples of innovative add-ons include checking the authenticity of a company by assessing its digital footprint, website, and so on.
The three pillars for MarketInvoice when it comes to credit assessment are: the applicant (the small business), the end-debtor and the relationship between these two companies.
“It speeds up our real-time monitoring,” said Mehra. “There’s the initial underwriting process where you get information that’s fairly up to date, but things can change. By using these sorts of integrations, we identify changes faster, which then allows our credit performance to be better, which in turn translates to better returns for our investors.”
In time, MarketInvoice hopes to use these sorts of integrations as a means of helping users to identify upcoming cash-flow squeezes, which could provide a meaningful boost to origination volumes.
On the platform’s average duration of 40 days per invoice, Mehra said that information feedback comes in a great deal faster than it would for a typical term lending business at MarketInvoice, and that this allows for more effective portfolio management.
The investment proposition
MarketInvoice is as unusual an investment proposition as it is an unorthodox assessor of credit. For many within the online lending space, 2016 was a turbulent year for investor demand. Many loan-purchasers walked out of the door, while a few new faces surfaced. But MarketInvoice hasn’t seen its mix change a great deal. The platform is currently split roughly 50/50 between high net worth individuals and institutional investors. Its institutional backers include the British Business Bank.
But scale has been a bit of an issue for the platform to date. The short-term nature of the product means that its outstanding value is usually a lot lower than its counterparts within the peer-to-peer space, even if their cumulative lending figures look comparable.
Specialising in a short-term product means that MarketInvoice must also reckon with the complexities of deployment times and drag. Asked whether investors encounter any issues with drag on the platform, Stocker described what he sees as a kind of “balancing act”.
“It’s difficult because we want our transactions to clear instantly, we don’t want businesses to have to wait for their funding. So we do need to maintain a bit of a buffer, and so there is some drag,” he explained.
The difficulty of invoice finance is its unpredictability: at any moment a business could receive a big order and have a sudden need for product. But Mehra works closely with the company’s sales team to ensure that he has visibility on the sales pipeline, helping him to manage drag.
Commenting on the numbers for 2016, Stocker reminded me that it’s quite common for invoices to fall into arrears.
“After a certain point of time we say that the invoice is defaulting, which means that we have to take some action,” he explained. MarketInvoice then chases the borrower and the end debtor in an effort to collect on the overdue invoice. But after a certain period of time, it will have to be crystallised as a loss, despite the fact that collection efforts are “ongoing”.
“Due to this crystallisation of losses, last year might look like we’ve had more losses than other years, but we still haven’t collected on all those defaults,” said Stocker. Clearly there is a point at which the invoice is written off altogether, which comes after all collection methods have been unsuccessfully exhausted. But we’re not yet at that point for the 2016 cohort.
Asked whether the high level of transparency maintained by MarketInvoice and others in the marketplace lending space is a useful tool when speaking to investors, Mehra described the asset class as “unique”.
“The more transparent we are, the more investors we can get on board, the better it is because we open ourselves up to a more diverse base of investors, which then ultimately translates to a cheaper cost of capital, which means that we can help small businesses more by providing them better pricing,” he said. “Third party providers like AltFi Data Analytics are very good because they allow investors to be more educated about the risk/return opportunities that they have on an apples-for-apples basis.”
Given the short-term, reasonably expensive (in comparison to typical term loans) nature of the MarketInvoice product, one might imagine customer retention to be an issue for the platform. I questioned Stocker and Mehra on this, and about whether it’s the case that small businesses are in effect using the product only until they’re able to “graduate” to longer-term capital solutions.
“When a company uses us, on average they go on to use us around ten times a year,” said Stocker. “Since we started, 81 per cent of businesses that have used us once go on to use us a second time. In 2016, that number went up to 86 per cent. The big thing for us is to get customers over the line and to use us once.”
However, the MarketInvoice boss conceded that some businesses come to the platform in search of a longer-term facility, and that these tend to bit bigger, and tend also to come from industries which demand a permanent supply of capital.
“We’ve done a lot of work on that and we’re going to announce something quite soon,” said Stocker. As to what that something is, we’ll just have to wait and see.
The departure of a customer is of course seen as a bad thing for MarketInvoice, but the flip side of the coin is that it’s often a positive outcome for the customer. Some businesses arrive at the platform turning over £300k, work their way up to turning over £3/4m after using the product several times, and then decide that they no longer have a need for external capital.
“That’s a great story for them, and we’re very happy when that happens,” said Anil. “We just need to find more customers who want to go on that journey.”