A little over a month ago, Loanpad HQ discussed a range of topics for upcoming blog posts including the upcoming IFISA season, importance of cybersecurity and loan due diligence. Fast-forward to today and our team are primarily working from home, stock markets have suffered losses unseen in decades and the world has united in its efforts to battle and defeat Covid-19.

Like many other businesses, we will do whatever we can to support the country so that we can all get through this together.

First and foremost, we join everyone in hoping that the best experts in the world manage to contain the fallout as best possible, slow the spread and ensure the availability of medical treatment for everyone. Our business has a strong ethical stance and we hope that at times like this we will see the very best traits of humanity come to the fore where we strive to help and care for all those around us who may need our help in many different ways. 

The P2P market is by no means immune to the impact of Covid-19. Like other asset classes, the sector has seen an increase in withdrawals with many platforms effectively banning the ability of investors to access their money.

In these times, investors should realise that P2P firms vary significantly in risk appetite, structure and makeup of loanbook. Investors should do their homework on the various platforms and see what is on offer. Some of the questions you should consider include:

1. What security is there? P2P platforms either make unsecured loans to businesses and individuals or loans secured against some form of tangible asset, like property. Unsecured loans by their very nature are higher risk as investors have no recourse if a loan goes into default. Loanpad only makes secured loans against property to ensure the property can be sold if necessary to recover your money.

2. If security is taken, what are the loans to value? Even when security is taken, P2P platforms can decide how much to lend as a percentage of the security value. The higher the loan-to-value (LTV), the higher the risk as there is less of a cushion if valuations fall. Loanpad’s risk-averse business model only lends up to a maximum of 50% LTV with a current aggregate LTV of 28%.

3. Are commitments made to future loans? P2P platforms often ‘commit’ to property development loans where the funds are only released during the course of the loan. Without having set aside these funds at the outset, they will often have to rely upon either continual repayments from other loans or more deposits. Given the structure of lending partners, Loanpad does not commit to lending any future money.

4. What interest rates are offered? P2P platforms offer a wide range of interest rates linked to different account types and access times. The general rule of thumb is that the investors take on higher risk for higher return. Loanpad prides itself on lower-risk loans while still offering competitive rates.

We continue to believe that P2P has a firm place in investors’ portfolios. In recent days, the level of withdrawals at Loanpad has decreased to a trickle and we are seeing an upturn in deposits from both new and existing investors.

We do not see a material increase in risk of capital loss on any loans. Our loan structure is designed to outperform in tough market conditions. This is because our conservative appetite for risk (very low LTV property lending only) serves to shield our investors from falls in the property market which ‘may’ result from significant drops in the financial markets (as we are currently witnessing).

It is important to remember that the performance of loans on our platform is not directly correlated to the stock market and is in fact one of the advantages of using Loanpad.

We have always believed that most retail investors simply want to earn a fair return on their money that comfortably beats inflation in any foreseeable market conditions. That is what Loanpad aims to do and we fully expect to be able to do so even in these volatile times.   

Written by the Loanpad team 

Loanpad’s Chief Executive Officer, Louis Schwartz, and Chief Operating Officer, Neil Maurice, give their views on recent events in the Peer-to-Peer industry and what it means for the future.

Industry

The P2P industry, like many others, has been hit by a number of corporate failures in recent times.

As an industry, our concern must be with investors who not only have their assets frozen but also may suffer losses on their investments through a combination of both loan impairments and professional fees.  This is extremely unfortunate and, whilst all investors take risks, it raises many questions on operational controls, lending processes, due diligence and investor information disclosure.

Whilst a relative newcomer, we firmly believe that these corporate failures should not reflect on the wider industry. Loanpad, alongside our competitors, should focus on running our businesses in a stable manner, complying with all relevant regulation and guidance and putting the investor at the forefront and centre of any decision being taken.

We set out below a few of our thoughts on sustainability and navigating the P2P course.

Platform Risk

One of the biggest areas of risk that has come into very sharp focus in recent months is platform risk.

A fundamental principle of P2P lending is that investors should be exposed to borrowers’ credit risk (the risk of loans defaulting) but not materially to the credit risk of the platform. This is one of the things that differentiates P2P lending, where platforms simply act as an intermediary on behalf of the borrower and lender. Whilst at face value this is of course true, the recent administrations have quite clearly demonstrated that investors have been exposed to the good standing of the platform in ways other than borrowers’ credit risk.

So how are investors expected to be able to determine the level of platform risk when evaluating any platform?

The first thing many investors will look to is the size of the platform, with the supposition that bigger is safer. Whilst in many cases this would seem logical, in the world of P2P we remain unconvinced by this argument. This is primarily because no P2P platforms would appear to have reached profitability on a consistent basis and some are still showing significant ongoing losses.

With the FCAs minimum regulatory capital requirements in place, losses can only be sustained via new equity being raised. However, the “golden years” of ever-increasing equity injections appear to be dwindling. Quite simply, platforms must now become self-sustainable to survive over the coming years and we envisage large-ranging changes to platforms’ business models. 

So back to the question – how can investors reasonably evaluate “platform risk”? Sadly, with much difficulty and imprecision as most available information is historic.

However, the introduction of the new FCA rules in December 2019 will go some way to helping investors evaluate platform risk through clear disclosure on loans under management, fees and the rate of interest charged to borrowers. In addition, all platforms will need to adequately disclose their wind-down plans so investors can compare and contrast the approach platforms are taking to wind-down.

At Loanpad, despite being just 9 months post-launch, we anticipate reaching profitability and self-sustainability by 2020.  This is as a result of our unmovable focus on sustainability ahead of exponential early growth.

Our focus is to steer the business to profitability whilst continuing to provide investors with (what we believe to be) the market-leading P2P product. 

Revenue Models

One of the issues identified through the corporate failures to date is that many platforms generate a significant proportion of their income at the time of loan origination. Whilst perfectly acceptable to charge fees, this creates an inherent need to originate new loans to fund operating expenses which in turn relies on regular loan repayments and / or new investment.

At Loanpad, our income is generated from a Loans Under Management margin such that we earn income on a daily basis in the same way as when our investors do. This ensures that our income is stable irrespective of the level of new loans originated in any given period.

In the coming month and years, we envisage greater scrutiny on how platforms earn their revenues and the sustainability of the underlying business models.

Governance & Wind-Down Plans

Perhaps the most intriguing factor of these corporate failures is the role of governance and wind-down plans.

The overarching aim of a wind-down plan is such that the Board tracks and identifies when a wind-down should be triggered and then initiates the wind-down of the loanbook in an orderly fashion. Importantly, this must in good time before a business runs out of cash to operate.  

Whilst each circumstance is different, we believe that strong corporate governance, a tight control on costs, clear and measurable indicators of the need to initiate a wind-down and full financial planning for the wind-down period are essential in any P2P platform.

In our opinion, the alternative to an orderly wind-down is falling into insolvency by way of administration or liquidation. This is the scenario that should be safeguarded against as otherwise the risk to overall recoveries and fees undoubtedly increase.  Whilst wind-down plans must consider their interaction with general and insolvency law, we believe that the initiation and completion of a successful wind-down plan should occur before any insolvency process is required.