Peer-to-peer lending is not just for adventurous investors, as Loanpad founder and chief executive Louis Schwartz explains…
ALTERNATIVE finance is – by its very nature – outside of the mainstream. It is a form of lending that comes with a different type of risk and as such it often attracts a different type of investor. But Louis Schwartz, founder and chief executive of peer-to-peer lending platform Loanpad, is on a mission to try to reduce risk to a point where even the more conservative investors are catered for.
“Of course, savings and investments are different and shouldn’t be compared,” says Schwartz. “So, whilst we don’t want to compare our product to savings, we are trying to be the closest thing to a savings product in the alternative space.”
Loanpad is doing this by taking an unusual approach to account management and credit risk – an approach that has been two years in the making.
The platform offers two accounts, where users can view a clear transaction history at the touch of a button. Interest is paid daily, and it can be reinvested or withdrawn at any point so that investors can benefit from compound interest as well as a high level of liquidity.
But Loanpad’s real USP is its attitude towards investor risk. In the case of a default, the platform’s structure enables it to shield investors from at least the first 25 per cent of any shortfalls and often 50 per cent or more.
“We’ve created a senior structure whereby our investors are only exposed to a certain level of the security, as we have an experienced balance sheet lender retaining a large amount – generally 25 per cent to 50 per cent – on a first-loss basis,” says Schwartz.
“There is no one else in the P2P sector creating a structure with this much ‘skin in the game’. Obviously, many companies have provision funds but they generally represent a very small percentage of the overall loanbook – maybe one or two per cent.
“We are enabling investment into loans where there’s at least 25 per cent ‘skin in the game’ from an experienced balance sheet lender.”
By prioritising investor security, Schwartz concedes that Loanpad is not going to be the platform that offers the highest rates, but this was never his end goal.
“We’re very clearly aimed at the lower end of the risk scale, offering unparalleled security for our investors,” he says. “We aim to be the lowest-risk P2P platform bar none. And we can’t wait to bring a fresh new approach to alternative lending.”
Even before its official launch, Loanpad is breaking the mould, with a brand-new model of peer-to-peer lending that is set to upend the sector. Chief executive and founder Louis Schwartz reveals his innovative formula…
THE UK’S peer-to-peer lending sector has a reputation for being innovative. But it is still surprising when a new company comes along and does something truly different.
Due to launch in the third quarter of this year, Loanpad has been in development for almost three years, while chief executive and founder Louis Schwartz perfected the formula that just might upend the entire P2P model.
In an industry first, Loanpad allows retail investors to invest alongside professional lending partners, with the professional lenders taking on a greater level of risk. Schwartz describes it as “the first real hybrid P2P platform”, offering retail investors the ability to participate in P2P lending with an additional layer of protection.
“Loanpad is effectively partnering retail investors on our platform with established professional lending partners on a senior and junior basis where professional lending partners have the junior level security giving retail investors a higher level of safety,” explains Schwartz. “Arguably, Loanpad is the first real hybrid P2P platform as retail investors get the benefit and stability of a professional lending partner without the platform actually putting ‘skin in the game’. Significantly, this means that the platform bears no credit risk on the underlying loans so there is no impediment to growth.”
Initially, Loanpad is targeting returns of four to five per cent for its investors by sharing short-term property-backed loans to businesses and property developers. Loanpad is offering an interest rate boost of 20 per cent on all its accounts until 28 February 2019, exclusively to the first 100 investors on the site.
All retail investors will be able to choose from two different accounts: the Classic Account, where investors can access their capital daily, free, at any time; and the Premium Account, which offers a higher rate, although lenders have to give 60 days’ notice to withdraw their capital free, or pay a small charge to access their funds early. This is all part of Loanpad’s liquidity goal, whereby investors can collect their returns on a daily basis and remove their money whenever they like.
“I ask myself why no-one else is doing this and I think it’s because the sector is still young enough that this model hasn’t appeared,” adds Schwartz. “What we do is enable professional lending companies to ‘securitise’ approved loans on our platform, but they must retain their own portion of at least 25 per cent of each loan as a first loss position. So, there is a direct relationship between investors and borrowers, but managed alongside professional lending partners.”
The combination of daily interest, daily access and lower levels of risk is likely to draw comparisons with bank-based savings accounts or cash ISAs. There is of course one major difference – unlike bank accounts, Loanpad actually offers inflation-beating returns.
“A cash ISA is risk free but there’s low returns,” says Schwartz. “We’re offering an Innovative Finance ISA with a much higher return albeit with a level of risk, but we are protecting our investors with an extra layer of security through the lending partner model.”
If successful, Loanpad may have just invented a new model for P2P which strikes the perfect balance between risk and reward. And in the current economic climate, that may be exactly what investors are looking for.
Check out our ‘invest’ pages to learn more about model and apply today for our either our Classic or Premium lending account.
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Louis Schwartz, chief executive of Loanpad, explains what investors need to look out for when considering peer-to-peer lending…
WITH EVERY investment comes an element of risk, and peer-to-peer investing is no exception. But communicating this risk to investors can be a tough task. However, according to Louis Schwartz, chief executive of soon-to-launch P2P platform Loanpad, there are three key points to consider when talking to investors about risk.
“There are three main types of risk associated with P2P lending: platform risk, credit risk and liquidity risk,” he says. “Platform risk is essentially the risk of the platform itself going out of business, while credit risk is the chance of loans defaulting and losing money, and liquidity risk is how long it may take you to exit a platform if you decide you no longer want to invest there.”
Schwartz believes that these three risk concerns should be at the forefront of any investor’s mind, and Loanpad is committed to spreading this message among all of its existing and future customers.
“I think it’s important that investors look at all of those three areas,” says Schwartz. “And that they have a clear understanding of where they would sit in bad conditions as well as good conditions.”
So, how does Loanpad mitigate these three risk areas?
1. Platform Risk
Platform risk has been making headlines this year in the wake of the Collateral collapse. Investors now know that P2P platforms can fail, and they want to know what will happen to their money in this worst-case scenario.
Collateral’s situation was unique as the platform was not regulated by the Financial Conduct Authority, and Schwartz says that he doesn’t expect to see a similar situation within the P2P sector. However, he has put a number of checks and balances in place at Loanpad to further reassure investors.
2. Credit Risk
Loanpad has built a unique model to mitigate credit risk, which involves creating a senior and a junior loan structure where the lending partner retains a higher level of risk.
“This means that the security underpinning each and every loan on our platform is greater than can typically be invested in elsewhere,” Schwartz explains. “Furthermore, Loanpad’s investors are spread across every single loan in the portfolio every day, which has the effect of reducing the impact if any losses occur. So, essentially our lending structure reduces the likelihood of any losses and our daily diversification function reduces the impact of any losses even if they do occur.”
3. Liquidity Risk
“Every platform has different liquidity terms ranging from instant access to no access,” says Schwartz. “However, all platforms are essentially reliant on other lenders buying investors’ loans to provide the liquidity they may offer. So, to understand the true underlying liquidity on a platform it is imperative to consider the length of the underlying loans.”
Typically, P2P loans can range from one year to 10 years. Loanpad minimises the liquidity risk by focusing purely on short-term bridging and development finance loans.
“The longest loan on our platform is likely to be no longer than eighteen months, with the average term probably around twelve months,” says Schwartz.
These timeframes ensure that no one should be trapped in an investment for multiple years, thus improving the overall liquidity of the platform. And combined with Loanpad’s mitigation of credit and platform risk, Schwartz is confident that investors are kept well-informed and well protected.
Click here for more information about Loanpad.
If you’re looking for an efficient and user-friendly way to invest, you may be exploring online peer-to-peer (P2P) lending – and wondering which platform can offer you the best value for your money based on your investment objectives and preferences. A strategic way to kick off the selection process is to compare the different P2P lending models, which continue to evolve as new players enter the ecosystem.
The approach that most people are familiar with is the pure P2P lending model, which first emerged as an innovative and accessible alternative to high-street banks. For investors, this model offers an opportunity to:
- lend directly to borrowers with relatively small investment amounts;
- and typically benefit from higher interest rates than they would through easy-access cash savings accounts at retail banks albeit with a higher degree of risk.
Being digitally-driven, pure P2P platforms are also lightweight and agile, which supports shorter turnaround-times and a simpler, more transparent customer experience for both lenders and borrowers.
How pure P2P lending works
This type of model offers a digital marketplace that matches borrowers and investors, without the business financially committing to the transaction. Pure platforms earn revenue from loan origination and servicing fees. Thus, growing the business relies heavily on the platform’s ability to continually attract higher volumes of investors and borrowers. This can be a challenge during slow economic times or as bank savings products become more competitively priced. If these platforms cut their lending costs to attract borrowers, their lenders lose out.
What’s the alternative?
Another approach is the balance sheet lending model, which existed long before pure P2P platforms entered the market. Balance sheet loan originators put their ‘skin in the game’ by lending their own money – and therefore shouldering the credit risk internally. If the loans are not repaid, the balance sheet lender loses money.
P2P platforms, on the other hand, do not lend their own money and simply match borrowers with investors. It is the investors that ultimately bear the risk of losses.
However, the balance sheet lending model is more capital intensive than the pure P2P model. This provides P2P platforms with the potential to be far more scalable.
Bringing you the best features of both pure P2P and balance sheet lending
Loanpad offers a new hybrid lending model that combines the benefits of the pure P2P lending model and the balance sheet lending model. With Loanpad, balance sheet lenders (with their incentive to stay safe and only originate good loans) share loans with investors, who benefit from that quality assurance.
Simultaneously, by harnessing advanced technologies, the Loanpad platform offers an uncomplicated, user-friendly investment experience – providing the speed, efficiency and simplicity associated with pure P2P lending platforms.
In essence: Loanpad offers lower risk P2P investment suitable for the mass retail market that’s as simple to operate as using a bank account. Yet it offers higher interest rates than traditional savings accounts due to the lending model albeit with a higher degree of risk.
An innovative way to manage risk
Loanpad is a pure matchmaker and does not lend any of its own money. Rather, it partners smaller investors with established property lenders (who are balance sheet lenders and therefore ending their own money).
Over and above this benefit, the established property lenders (lending partners) take at least 25% of each loan on a first-loss basis – putting ‘skin in the game’ and shielding the smaller investors from initial losses. This structure provides further safety and quality assurance.
Loanpad loans are converted into two disparate risk classes:
- A lower risk senior part for smaller investors
- A higher risk/return part for lending partners
The lending structure aims to minimise the chances of any loss, as well as the impact should a loss occur. It achieves this by both diversifying investors’ portfolios across the entire performing loan book, daily (reducing impact of any losses) and ensuring that the lending partners hold their tranche on a first loss basis (reducing chance of any losses).
Loanpad earns revenue from a margin between rates paid by borrowers and rates paid to investors. Thus, its income is aligned with that of its investors. This, combined with the fact that Loanpad investors have a direct loan relationship with the underlying borrowers, means that Loanpad aims to offer a hybrid P2P lending structure that is stable, simple and efficient.
Check out our ‘invest’ pages to learn more about model and apply today for our either our Classic or Premium lending account.