Fees Fees Fees!

By Sam Griffiths on 24th September 2015

A few weeks ago the FT carried an article which touched on the importance of transparency around fees in peer to peer lending: “it is vital that investors are informed of the fee”.   

Fees Fees Fees!

Here at AltFi Data we fully agree with this sentiment but wanted to develop the observation and actually identify what fees are being charged. Peer to Peer/marketplace lending platforms are relatively simple when it comes to revenue drivers. The vast majority of revenue comes from upfront fees charged at the point of loan origination. Most platforms also charge a running fee for the length of time that the loan is outstanding. A much smaller amount of revenue will come from secondary market transactions which we will discount for simplicity in this analysis. Often the upfront fee is apportioned to borrowers and the running fee to investors. We feel that this is a bit arbitrary and potentially misleading – all fees add friction to the system, reducing the amount that is paid by the borrower that the investor receives, thereby reducing the investor's return or increasing the cost to the borrower.

To identify exactly what level of fees are being charged we have examined the reported revenues of the top three UK Platforms and compared them to the outstanding loan balances and origination volumes for the same period. By doing so we can infer the % upfront fee that was charged. 

To calculate upfront fees we must first adjust for any running charge that is levied. In 2014 Zopa and Funding Circle charged 1% per annum on balances outstanding. Since 6th April 2015 Zopa have modified this levy. It is now a Loan Servicing Fee, but is still 1% per annum. RateSetter have confirmed to AltFi Data that they do apply a running fee however they declined to reveal its magnitude. For the purposes of this analysis, we assume that RateSetter apply a similar running fee to Funding Circle and Zopa (1%). If we then assume that all revenue that does not come from running fees comes from upfront fees and is therefore solely a function of origination volumes, we can calculate and compare each platform’s upfront fees. This is done by comparing a platform’s origination volume over a period, with their revenues over that same period. It must be remembered that these upfront fees occur only once in the life of the loan and with the average life of a loan being around 2 years on these platforms, the annualised cost works out at just over 1.5% per annum over the lifetime of the loan.

The table below shows the average borrower fee for all three platforms using this methodology.

 

Year End

Revenue (£m)

Estimated Running Fee Revenue* (£m)

Average TOTAL Upfront Fee (% of Origination)

Annualised Upfront Fee over life of loan (% of Origination)

RateSetter

3/15

12.5

2.23

2.84%

1.81%

Funding Circle

12/14

11.8

2.29

3.41%

1.67%

Zopa

12/14

11.5

2.71

3.30%

1.42%

*1% of average origination outstanding over the period.

It is striking how similar these average upfront fees are across the three platforms.  

But this apparent similarity disguises three interesting observations. 

  • Firstly it is notable that all platforms charge borrowers a similar fee despite the fact that they cater to different types of borrower – Funding Circle lending to SME’s and RateSetter and Zopa to predominantly consumers. 
  • Depending on whether one looks at the upfront fee on an outright basis or annualised over the average life of the loan, RateSetter is either charging the lowest or the highest fees respectively.
  • Lastly, given that RateSetter was the only platform to turn a profit over the period, looking at the non annualised upfront fee, we can infer that the platform had a lower cost base. 

Disclosure of fees is indeed desirable. Whilst we cannot be certain that these numbers are spot on we very much hope that this analysis adds some light to the situation.  

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