A Fresh Take on UK Consumer Lending

The UK’s consumer lending scene is slowly but surely diversifying.

Until fairly recently, variety within the consumer P2P market was rather dwarfed in comparison to the range of different platform structures on show within the alternative business funding sector. But Zopa, RateSetter, Lending Works and Funding Secure have now been joined in the Liberum AltFi Volume Index UK (LAVI) by a new entrant in the form of Lendable. The platform – which recently crossed the LAVI entry threshold (cumulative origination volume equal to 0.1% of cumulative LAVI origination to date) – branches away from the typical P2P consumer lending structure.

Lendable has lent £4.1m to date, £3.2m of which has been matched in 2015 alone. The platform brings a fresh credit model to this so far fairly risk-averse segment of the alternative finance space. Lendable’s target borrowers occupy a slightly higher tract on the risk curve than the typical customers of, say, a Zopa or a RateSetter. Lendable Founder and CEO Martin Kissinger describes these borrowers as “near-prime”.

Lendable loans are funded by a blend of high net worth individuals and institutional investors. Mr. Kissinger sees numerous advantages to this approach. We sat down with the Lendable boss to learn more about the nascent platform.

How much has Lendable lent to date and how is the portfolio performing?

Lendable has lent over £4M since July 2014, and is growing fast - we are about to reach £1M in monthly volume in June. Across our six risk grades, our recent origination generates an average 14% return to our investors before losses, and based on current performance, we expect to achieve around 10% net annual return for investors.

Since most of our origination is in the mid-risk segment, our loans are typically smaller than those of prime-only lenders - around £3,000 average, compared to Zopa’s £8,000. That means our portfolio is more granular and we have a bigger sample size at any given volume.

Why have you chosen to focus on select high net worth/institutional investors, as opposed to retail investors?

There are a few reasons for this, in two areas.

The first is that we see clear demand for a product catering to sophisticated investors, which differs from that of traditional P2P platforms.

Our lenders can access higher-yielding consumer credit assets, which are not necessarily right for the retail market. We also simplify their onboarding process: “lenders in the way of business”, such as funds and corporates, do not need FCA authorisation as a consumer credit firm to invest on Lendable.

The second is around our own operational efficiency: it is easier to support a few larger investors than thousands of individuals, and we can pass on this efficiency in the form of higher returns.

It also lets us be more transparent. When a smaller number of sophisticated investors commit larger tickets, it allows us to give them deeper insight into our technology and underwriting. That way, they can make a better-informed decision about investing on Lendable.

How are you able to ensure high quality loan origination given the types of borrowers that you cater to - who are, by your own admission, riskier than the clientele of say a Zopa or a RateSetter?

In general, having higher-risk borrowers is not a problem as long as that risk is priced correctly, making sure that any loans written are affordable to the borrower. Going further, I believe that compared to the competitive prime lending space, where you compete with the banks, the near-prime segment offers better risk-adjusted returns.

At the same time, our loans are distinctly different from subprime loans, and our underwriting remains rigorous across our entire lending spectrum: all our borrowers have verified, stable income, and none of them have significantly impaired credit histories or show signs of financial stress.

Experience helps as well. The head of our risk committee, Mark Gunton, was previously Chief Risk Officer of HSBC North America, and profitably managed one of the largest unsecured consumer credit portfolios through the last cycle, covering the whole risk spectrum from prime to subprime.

Finally, I think that all else being equal, we can attract better borrowers, by building the best customer experience and removing friction from the application process.

And finally, generally speaking, how difficult is it for an early stage entrant to carve out a niche within the UK P2P space?

I can’t speak for the space in general, but we saw an interesting gap among consumer lending platforms, and I suspect the same may be true when one looks more closely at the various asset classes.

In Lendable's case, I think we have built a compelling proposition in a large market, both for investors (higher yields, stronger margins of safety, easy onboarding for funds) and for borrowers (instant decisions and personalised rates for more people, with simple and fair terms).