By Ryan Weeks on Tuesday 9 September 2014
Research from Cognizant recently revealed that the single most sought-after feature for borrowers sizing up the many peer-to-peer options is for a platform to have a system of bank-style branches in place. This of course came as something of a surprise – given that none (well, next-to-none) of the platforms can currently boast even a single branch. Rather than specifying which existing features they liked, the borrowers surveyed by Cognizant were outlining what they would like to see change about peer-to-peer lending.
So, should the many platforms out there be listening to this demand? Is a bank-like physical infrastructure – or indeed face-to-face interaction in general – a sensible thing for online lenders to consider?
Perhaps the best way to find out is to size up a few existing examples of face-to-face interaction within the alternative finance world, and to examine the pros and cons of each of the various approaches.
The most pertinent example of face-to-face interaction in alternative finance is provided by Folk2Folk. This platform is the reason for the “next-to-none” inclusion within my opening paragraph. Folk2Folk has a number of branches in the South-West of England. The Cornish peer-to-business lending platform secures all loans against property and has lent nearly £32m since its inception, according to AltFi Data. “Personal touch” is a key distinguishing feature for this particular platform – and it’s allowed them to grow very quickly since launching in March 2013.
So what role have the high street branches played in that growth? Clearly it’s a difficult thing to quantify. The graphic on the right from leading peer-to-peer platform Zopa shows a relative dearth of Zopa users in the South-West. Not so for Folk2Folk. The platform’s premises have doubtless been an important factor in getting local users over the hump of engaging with P2P lending.
The issue with Folk2Folk’s model might be one of scalability. The platform’s focus seems to be firmly on the South-West currently – but at some point it will undoubtedly be looking to expand its horizons. If the model is to remain unchanged, premises will need to be established in every new geographical region that the platform arrives in. So costly an infrastructure may well damage the rates for Folk2Folk lenders. The platform recently revealed that the majority of its lenders in Cornwall and Devon come from within 40 miles of a Folk2Folk branch.
Managing Director David Brown recently announced in a video that the platform is taking its operation – thus far focused on Devon and Cornwall – to “counties further afield”…
In response to the Cognizant research referenced at the start of this article, David Brown commented:
“It was very interesting to see the survey results by Cognizant from the US P2P market and the most desired feature of branch availability. Since Folk2Folk’s inception and building on the core ‘personal values’ of Parnalls Solicitors Private Mortgage business, from which Folk2Folk was born, we have identified the clients recognise the benefits of a very personal service.”
“Whilst keeping the online presence to give current and future clients information about lender and borrower opportunities, it was clear they were looking for something more.”
“The website gave them the core information but we continued to experience a high call volume, which lead to face-to-face meetings and then eventual business.”
“The need to put a face to a name, or a broader discussion on actual requirements was generally the feedback received.”
“We believe that by adapting to and meeting people’s needs we have continued to receive more and more referrals from like minded clients.”
ThinCats has a very different model but with one crucial area of overlap: face-to-face interaction. ThinCats is a peer-to-business platform which allows its “sponsors” to take command of the borrower origination and evaluation processes. Here’s the platform’s description of sponsors and the role that they fulfill:
“Sponsors are the first point of contact for borrowers and potential borrowers. They are financial services professionals, usually teams that include at least one person with banking experience. They assess the business proposals and vet applications for loans. They help the borrower to prepare the loan information. That includes meeting with the borrower and getting to know their business, team and potential, as well as assessing the security on offer. They answer questions from lenders during the auction and monitor the loan after it has been completed. Borrowers cannot be featured in an auction without the support of a sponsor.”
Pretty much every other peer-to-peer lending platform out there carries out its due diligence in an online, automated fashion. The ThinCats team has tried to add an extra layer of depth to its credit-checks on prospective borrowers. The alternative funding space in general is obsessed with speed. Some specialist revenue-based finance providers can go from application to funded in a matter of minutes. And these more nimble forms of finance have been warmly welcomed by businesses all over the world, but ThinCats is bringing something slightly different to the table. The approach is probably contrived to attract more traditional investors who feel otherwise uneasy about the online lending phenomenon.
And on the borrower side, sponsors continue to act as guides to businesses right up to and beyond the auction process itself. You will occasionally catch ThinCats representatives referring to these sponsors as “relationship managers”.
If there’s a downside to the approach – it’s that it has inevitably slowed the growth of the platform somewhat. At the start of 2014, ThinCats was second only to Funding Circle among peer-to-business lenders in terms of cumulative loan originations. It now sits in fourth – behind both LendInvest and Wellesley & Co. To be fair, those last two platforms are more specifically property lenders and certainly their representatives will be meeting the developers for which they provide funding in person. The difference for these property development-based platforms is that the average size of each deal will typically be much larger – and so growth doesn’t slow down. And in fact deals of this size are probably only possible to undertake responsibly with some kind of in-person interaction.
Funding Circle represents a more comparable benchmark for success with ThinCats. You would expect older and larger platforms to pale by comparison with smaller platforms in terms of growth, but in fact Funding Circle’s growth rate over the last 12 months has outstripped that of ThinCats – 142.5% to 127.4% – according to AltFi Data.
The master plan – I suppose – for both Folk2Folk and ThinCats, is to forego dizzying growth rates in the short-term in order to instead focus on quality of lending. Personal interaction, in one way or another, is central to the efforts of both platforms in this regard. Is it working? Well, according to Folk2Folk’s website – the current default amount is £0 (based on the amount lost by a lender – “excluding temporary delays in interest payments”). But that figure isn’t going to be truly reflective of the quality of the platform’s loan book – given its relative youth. A few years down the line we may have a clearer idea of whether Folk2Folk’s personal touch has paid dividends.
I think the big issue here is that outfits like Funding Circle – which does not for the most part indulge in face to face interaction – has achieved a respectable quality of lending over its four years nonetheless, as well as a ton of volume.
There’s an example of a similar kind of trade off in the equity crowdfunding sphere. CrowdBnk – which is perhaps the fifth largest player in the UK equity space – is an online platform that also offers its users the chance to meet in person. CrowdBnk hosts quarterly investor evenings at which the platform’s listed entrepreneurs showcase their projects to a room full of inquisitive investors. It’s a valuable addition to the video pitches, business plans, profit forecasts, and so on that are typically presented to equity crowdfunding investors in an online format.
But rather like ThinCats, and to my mind not coincidentally, CrowdBnk has grown rather slowly since launching at the start of 2013. SyndicateRoom, which is only a year old, is now several times the size of CrowdBnk. I don’t think it’s unreasonable to suggest that adding a distinguishing personal element to an otherwise online alternative finance platform will generally slow the pace of its growth.
By way of elucidating the clear benefits of being a lean, purely online finance provider, check out these graphs from Cormac Leech’s presentation at the AltFi Summit back in March. Cormac is a Senior Analyst at the investment bank Liberum.
The challenge for all varieties of platform is to try to walk the line between not being seen as a faceless, tech-based company, and not making too many sacrifices in terms of the speed of funding available and the quality of interest rates on offer. These last two factors are key amongst the advantages held by the alternative finance platforms over traditional funding providers – and should not be relinquished lightly.
Yes – there is a call for personal interaction from platform users that the industry should probably take heed of. But it will have to live up to its “innovative” billing in answering that call. I’m not convinced that any appropriately imitable, traditional infrastructure currently exists for the alternative finance world to follow. Folk2Folk, ThinCats, CrowdBnk and a host of property lenders now sport models with a face-to-face, “personal touch” element. Time will tell if those platforms are able to balance the benefits of both online slickness and physical accessibility.
Are there any other ways that the industry might go about striking this balance? We should be receiving a considered answer to that question from a mystery leading platform within the next week or two.