By Ryan Weeks on Thursday 5 May 2016
Unsecured consumer lending platform Lendable was founded in July 2014 and has quickly worked its way to a cumulative lending volume of over £17m. Its 3 month market share within the UK peer-to-peer sector now stands at 0.74%, making it the third largest unsecured consumer lending platform in the UK by 2016 volume, according to the Liberum AltFi Volume Index UK. With a year-on-year growth rate of 430%, Lendable is starting to make waves, but what’s going on under the bonnet? I caught up with CEO Martin Kissinger this week to better understand the mechanics of the rapidly scaling platform.
Lendable carries a consumer credit licence, but doesn’t need to be regulated under 36H rules as it does not accept retail investors. Martin believes that the consumer credit regime is a good deal weightier than the regulations that apply specifically to peer-to-peer platforms.
Lendable operates a marketplace model, but one which tailors exclusively to sophisticated private investors and to institutional investors. The platform carries a minimum investment amount of £100,000. Martin explained that a key facet in the company’s ethos is that investors participate in the marketplace on a level playing field.
Lendable has just one investment product, but investors may choose between funding whole loans or fractional loans. Users may borrow between £1k and £15k over a term of 1 to 5 years. Particularly relevant to borrowers is Lendable’s intention to be the fastest platform to reach a decision on applications and to fund loans. The platform aims to have funds in a successful applicant’s account within 2 hours of application. Martin explained that Lendable offers a product that is “very close to the point of the purchase” – which could be used to, for example, buy a car advertised on a listings platform on the same day. Being able to offer borrowers the assurance of same-day funding places Lendable in a potentially valuable position.
The underlying asset for investors on the platform is always unsecured consumer debt. Martin talked of “passing through the full risk and return, minus the origination fee” to his investors, similar to the model established by Lending Club and Prosper. Lendable assets are currently delivering an average gross interest rate of 16%, with less than 4% in expected annual losses. The risk/return profile is wholly distinct from that offered by rival consumer lending platforms like Zopa and RateSetter, which tend to compete with mainstream banks for larger loans at lower rates.
Lendable offers its investors a unique range of features – features which Martin believes are only made available on rival marketplaces if an institutional investor has been able to cut a bespoke deal with the platform. Martin pointed out that his investors are able to purchase whole loans and to acquire leverage against their Lendable assets – which may be an interesting development angle for the platform down the line. Lendable investors are also able to operate segregated client accounts, should they wish to (i.e. no co-mingling of money with other investors). The platform has a backup servicing arrangement in place with Nostrum Group.
As an interesting aside, institutions that are investing in consumer loans via P2P platforms in the UK must hold a consumer credit licence in order to do so. This is not the case with Lendable.
Page 13 of the FCA's consultation paper on peer-to-peer lending states that a professional investor (or corporate entity) engaging in consumer lending through a P2P platform will need to be regulated as a consumer lender itself. Since the start of the new FCA consumer credit regime in April 2014, this has no longer been practical for the majority of investors. But Lendable is not authorised as a P2P platform because the company has chosen to work with a relatively small number of sophisticated investors, rather than with a large number of retail investors. Institutions may therefore invest through the platform without a consumer credit licence.
Lendable is able to provide its investors with a high level of transparency over the loans that are originated by the platform, due largely to the nature of the investors involved. Martin called it a “cleaner, safer” model. Communication is made a great deal easier through there being only a couple of dozen investors on the platform. This allows Lendable to share a deep level of data, through a real-time API – which translates in practical terms to full payment histories for borrowers, delinquency states and in general as much data as Lendable is able to share without divulging personal details of borrowers. Investors can go so far as to drill down to the level of an individual payment plan that Lendable has negotiated with a customer that has fallen into arrears.
We’ve been obsessed in recent times with piercing through the hype that to some extent clouds the nature of underwriting processes within the alternative finance space. Never mind the catchphrases – “big data”, “machine learning”, etc. – we’re hungry for specifics. Martin helped out by sharing some valuable insights on the Lendable model.
Lendable’s credit engine makes extensive use of technology; indeed the platform wouldn’t be able to function without it. They being a small team (of between 10 and 20 people), automation is key. As Martin explained, for larger loans, every individual ticket comes with a lot of margin attached. Such margins can support a highly manual underwriting process that takes days to execute. Many companies, including mainstream banks, are competing for these larger loans. As a consequence, rates on larger loans are about half that of a typical £5k loan. For smaller loans, the trend towards higher rates continues – and 75% of Lendable’s loans are below £5k.
Martin sees less innovation in the field of algorithms in credit, since they are inevitably built by teams of academics and machine learning researchers. Where Martin sees greater levels of innovation is in better understanding what data is available to a lender, and in implementing features in the underwriting process accordingly. Practically speaking, Lendable is able to generate uplift from feature engineering. The platform takes raw data from the bureaus and seeks to identify predictive wrinkles that the bureaus themselves may have missed.
A comparison of loans bought from marketplace lenders by institutional investors shows Lendable to have thus far delivered a 1.5x higher gross return at comparable delinquency levels than rival UK platforms and fund structures. Martin believes that it's a great deal easier for lenders to price risk appropriately in the segment of consumer credit which Lendable is addressing.
Lendable also uses automation as a means of maximising the effectiveness of its human underwriting resources. Human attention is a valuable method of identifying anomalies in an application, but human assessment is expensive. Automation can be used to narrow down the list of things that require manual inspection.
Lendable operates its own proprietary system for the above-mentioned purposes. Technology has been a firm focus for the platform from ever since its inception in early 2014.
Here I shall let Martin do the talking. Drumroll…
“We feel like we are reaching an important point in our development where a major investment bank has offered to provide financing against our loans. We are looking at building that over the course of this year into a securitisation structure.”
But with just over £17m (up to £20m by month's end, according to Martin) in cumulative lending under its belt, I wondered aloud whether Lendable is indeed ready. To this, Martin said:
“That’s fair, but we’re growing fast. We’re at an annual run-rate of £40 million and can originate £100M over the next year given certainty of funding.”
I noted that Lendable must have some pretty ambitious marketing plans in place to support its growth projections. Martin tells me that the platform will continue to focus on direct origination channels, with strategic partnerships playing a pivotal role. Targeted online marketing – as distinct from broad-brushed digital marketing tactics – will also be key. All-encompassing types of marketing often deliver more impressions, but these are of a generally lower quality.
Lendable’s marketing strategy again harks back to the need for this most lean of lenders to stay lean, in order to continue to support its smaller-ticket but thus far higher yielding brand of lending.