entrepreneur Q&A
Peer to Peer finance
Rhydian Lewis and co-founder Peter Behrens saw an opportunity to
compete with the banks and decided to set up RateSetter. Rhydian
Lewis explains to Chris Westcott about peer to peer lending and the
potential benefits to both parties
Peer to peer lending is an emerging consumer finance product –
can you give our readers a brief outline of this relatively new
method of saving and borrowing?
Peer to peer lending is a solution to a problem: the wide
spread between what savers earn in interest and what
borrowers pay for loans. It brings together retail savers and
borrowers directly. Rather than savers lending their money to a
bank and the bank then lending it on to borrowers, with peer
to peer the saver lends directly to the borrower. Many of the
processes – verification of the savers, credit assessment of the
borrowers, movement of funds – are actually the same as with
a bank, but the result is better value for both parties.
RateSetter has a different model to other peer to peer
companies – please can you explain these differences?
RateSetter has introduced three key differences: its Provision
Fund, its flexible term loan and the rate setting by both the
savers and the borrowers.
The purpose of the Provision Fund is to offer the saver
greater protection. All borrowers pay a ‘Credit Rate’ fee,
included in the APR of the loan, into the Fund. The level of
this fee depends on the individual credit profile of the
borrower. The Fund is managed to recompense savers in the
event that the borrower is late in their monthly repayment or
defaults on the loan. In this way, RateSetter has introduced a
capital buffer into the peer to peer model which will grow as
the platform grows.
The Provision Fund also has the benefit of spreading the
lending risk across all RateSetter's borrowers. It’s a more
efficient way to diversity risk: there’s no need for multiple
categories of borrowers, so matching between savers and
borrowers on RateSetter is significantly faster. Borrowers get
their loan quickly, and savers do not have to wait a long time
before they start earning interest – an obvious win/win over
previous models.
The second difference is RateSetter’s Rolling market, which
allows savers to earn a decent level of interest while having
monthly access to their money. It is a very flexible, low-cost
loan for borrowers, who can choose the term of their loan. The
Rolling loan is similar to the way credit card companies offer
credit, while being much cheaper.
The third difference with RateSetter is its ‘two-way’ market.
Traditionally, lenders dictate rates. With us, both the borrowers
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and the savers participate more actively in setting the rate. A
genuine two-way market should keep rates competitive for
both sides.
Can you tell us a little about the motivation behind setting up
RateSetter? When did you and your co-founder, Peter Behrens,
decide to do this? And maybe a little about the skillsets you
and Peter bring to the business?
We wanted to take a great idea and make it simpler and
better. I had been following the success of peer to peer across
many industries for a while. When the banking crisis hit, I saw
an opportunity for peer to peer to compete with the banks.
Peter and I set up the company in November 2009.
“With us, both the borrowers and the
savers participate more actively in
setting the rate. A genuine two-way
market should keep rates competitive
for both sides”
We both have backgrounds in banking. I worked at Lazard
in their Financial Institutions team which advises many of the
largest banks, insurance companies and fund managers on all
aspects of corporate finance. Peter qualified as a solicitor at
Ashurst, the City law firm, before moving to banking at RBS
on their lending side.
We have split roles so that Peter manages RateSetter’s credit
policy while I focus more on running the business and
developing our exchange platform. There is always a natural
tension in banking between business growth and credit growth
– us splitting the roles acts as an effective check and balance.
How difficult was it to raise funding? And how active are your
investors?
In theory it was quite a tough environment to raise money,
but I think good ideas always get backing. Once we had
explained to investors how our model was different to the peer
to peer models that already existed, the money was raised quite
quickly. We were oversubscribed in both our fund raises.
Our investors are all private individuals. They have been
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very supportive and we have been able to take advantage of
their wide ranging experiences in the process of setting up and
launching RateSetter.com.
How big do you think peer to peer lending can become?
There is no reason why it should not become very large –
over £25 billion is advanced each year to UK consumers. So
long as it can deliver savers market-beating, safe returns and
borrowers competitively priced loans there is no reason why it
cannot become a mainstream part of consumer finance. We
are very focused on making RateSetter a really good platform
for consumers.
We have just seen the banking industry face bad debt issues –
how do you provide comfort to savers?
There will always be bad debt and credit cycles – it is a fact
of banking. The key is how to make sure the right credit
decisions are made and how to provide for problems.
The first thing is that RateSetter has a very strict credit policy.
We use the same data as the banks and we also use a lot of
common sense – statistics and data are essential but you cannot
rely solely on them and we will always keep a manual
assessment of credit as part of our process.
We are competing at the Prime end of the personal
loan market – advances of around £5,000 to creditworthy
individuals. Many people assume we are targeting the
more risky end of the market – the people who cannot get
a loan from a bank. In fact the opposite is true – RateSetter
is competing directly against the high street and
supermarket banks.
The other reassurance we offer savers is our unique
Provision Fund which I have described in the earlier answer.
Why do people save on RateSetter.com?
Principally, because they earn significantly more on their
savings than they are on their bank deposits: on average 3.5%
for monthly access savings and 7.5% for three year loans.
There’s an emotional side to P2P too, though –they are
supporting something new that has benefits for both sides.
Why do people borrow on RateSetter.com as opposed to a
high street bank?
Again, the primary reason is rates: our Rolling loan is
probably the cheapest form of personal credit in the UK.
Borrowers are very rate sensitive and will look for the best rate,
and RateSetter is clearly competitive: over 70% of people we
approve take up the loan. Our customers also like the new
sense of control: the fact that they are involved in the setting of
the rates – as opposed to being told the rate by their bank –
has an emotional appeal.
What are the advantages of the model compared to a bank?
The most obvious advantage is that it shrinks the
middleman: it offers better rates for both sides. It uses
technology to do what a bank does for a fraction of the cost,
while providing effectively for risk. Peer to peer spreads risk
across a very wide pool of people as opposed to the banking
model that aggregates the risk into a few large financial
institutions. Their system can place huge strains on capital
Rhydian Lewis (right) with co-founder Peter Behrens
requirements and pose systemic risks; ours doesn’t.
Another advantage is that it perfectly matches retail savers
and borrowers. Banks can use retail deposits to fund other
activities such as proprietary trading, and we know where
that’s got us. With peer to peer, the direct connection between
savings and loans is kept intact.
We also give consumers more control: they determine the
fair level of interest rates. This “crowd pricing” is not only
empowering for consumers, but is also a very efficient way of
rate setting: it is sensitive to supply and demand in real time.
What has been the biggest challenge?
Making a complicated back-end process simple at the front
end. A lot of that work is done by our exchange platform
which acts intelligently, only showing the rates that are relevant
to each party. Getting the technology and website interface
right is the critical challenge, and from our customer feedback
so far it appears the website is easy to use.
What are the goals for 2011?
Activity on our exchange is doubling every month and we
would like that to continue. The room for growth is substantial
and we will continue to exploit this while also being very
cautious – if the growth of credit is too fast we all know where
that can end. So we just hope to continue to deliver a good
product for our customers.
We also would like to see the industry move forward in
terms of greater understanding and regulation. We are already
working with our established peer to proactively work
towards a sensible form of regulation that gives further
protection to our customers while also harnessing the
innovation of peer to peer, helping it grow to be a real
alternative to traditional models.
What are your plans regarding a Board?
All successful companies have Boards when they get big
enough. If we run the company right, the corporate structure
will follow naturally.
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