Industry comments on Funding Circle changes

July 4th, 2013
Funding Circle

It has been alost two weeks since Funding Circle raised their minumum lending rates, and then amended them following feedback from lenders.  Some of Funding Circle's peers within the industry have added some of their comments.

Comment from ReBuildingSociety:

There’s one topic dominating the peer-to-peer discussion boards at the moment – the decision for Funding Circle to implement a minimum bid restriction on its auctions.

Some of the criticism aimed at Funding Circle is that it has restricted the market and made it almost impossible for the crowd’s due diligence process to take place, such is the speed at which auctions are filling.

It is easy to sympathise with Funding Circle in the sense that it is dealing with quirks of a market that it created and every step is a step into the unknown. The minimum bid gives borrowers a clear view of the rate it will pay and will make marketing to borrowers and brokers much easier – it is now a fixed rate auction.

It is a sign of the popularity of the sector that too many people want to lend to UK businesses through Funding Circle for the existing auction process to support them. You could realistically assume that the typical Funding Circle lender profile has shifted from an investor to a saver and will shift again post-regulation.

All this is good news for the competition.

It will push early adopters onto the next level of platform, like, giving lenders greater choice in the market and allowing them to more evenly align the risk they see in the borrower to the rate they’re comfortable with. It is naïve in the extreme to believe that every C-rated business on Funding Circle carries the same risk.

That is an institutional approach and this market grew on the individuality of the lender market and the ‘fun’ aspect of evaluating and interacting with business owners, which wants to retain and nourish.

Comments from Assetz Capital:

I wanted to pass comment as someone working in another P2P platform, as this is indeed a big development and has the potential to affect the wider industry and not just Funding Circle. The rationale behind the change has never (as far as I know) been explicitly set out, but it's easy to guess that it's down to FC's concern that interest rates were too low for the associated risk. In theory, the change would result in less-experienced investors lending at a higher rate, meaning that their portfolio can withstand the likely proportion of defaults. However, what it's more likely to do in my opinion, is favour the less-experienced lenders, by driving out investors who want to get under the skin of a company (often by asking questions) before bidding. It's a tough situation to be in, but this isn't a road we'll go down - I'm confident that in the right environment and with risk properly explained and represented (this is key), interest rates will settle at a fair number.  At Assetz Capital, and as experienced SME and Property bankers, we have already made an in-depth assessment of the risk.  Whilst we offer fixed rate auctions to our lenders, we feel that the risk is priced fairly for both the borrower and a lender and is not subject to the whim of inexperienced investors.

Defaults might have formed part of the decision in setting minimum bid and, if this is the case, I full support Funding Circle in ensuring the less experience investors’ portfolios can withstand defaults. At Assetz Capital we take a different approach in taking tangible asset security against each loan so that should a default occur the ability to recover all, or at least most, of the lenders capital is greatly increased.  As such, we do not feel the need to set minimum bid rates.


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RateSetter reports a profit

July 3rd, 2013

Every week we receive press releases from various peer-to-peer companies, and tend to filter out the corporate news that doesn't really affect the average lender or borrower.  However the most recent press release from RateSetter had one interesting nugget of information, which was they reported a profit.

This is important for a business as continual losses can and will spell certain doom for any company, just as it would for an average person who spent more than they earned.

Peer-to-peer pawnbroking

July 3rd, 2013

A new peer-to-peer company has launched called FundingSecure (not to be confused with Funding Secured) and this allows individuals to pawn assets to obtain a loan.  Here is what they say:

FundingSecure introduces savers who wish to achieve a high return with borrowers who wish to take out short-term loans using their assets as security.  FundingSecure provides an alternative way of lending providing security to savers and cheaper and faster loans to borrowers.

There are pawnbrokers around on every high street, but FundingSecure are the first peer-to-peer company to offer this service.  From the lenders perspective, this is not too dissimilar to existing P2P companies, except their funds are secured against an asset (valued at more than the loan), meaning that bad debt should be low.  There is currently a special offer of 0% fees for the first 12 months for new lenders.

Funding Circle change minimum lending rates

July 1st, 2013
Funding Circle

Funding Circle have made some amendments to their minimum lending rates.  The P2P money blog reported last week that the minimum lending rates had been increased from 4% to between 6% (for A+ borrowers) and 10.5% (for C borrowers).  Following 64 pages of comments on the Funding Circle forum, these have been amended to between 6% (for A+ borrowers) and 9% (for C borrowers).  In addition they have stated that future changes will have 2 weeks notice.

A skeptical lender could say that Funding Circle have done a U-turn, but it would be fairer to state that they have listened to feedback and made changes.  It was 12 months ago when lenders threatened strike action after a rate change on another P2P company, and a year later after failing to reverse their decision lending was down 90%.

Here is the full statement on the Funding Circle blog:

Last week we introduced a trial of new minimum bid rates by risk band. Prior to this change the minimum interest rate you could bid on a loan auction was 4% across all risk bands. This was increased on 24 June 2013 and you can read our blog post announcing this initial change here.

When deciding to increase the minimum bid rate, we take into consideration a range of factors. These include the cost of alternative borrowing products, the returns available on other investment products, the general economic conditions, protecting investors from bidding rates significantly below the average and the estimated bad debt rates for each risk band.

Since announcing the start of this trial, we have received valuable feedback from investors on the forum, and also through a survey sent out on Friday, which you can see the results of here. Regular feedback from investors and borrowers is crucial to the success of Funding Circle and we’d like to thank everyone who has taken part so far.

Following the feedback we will be adjusting the trial minimum bid rates to the following levels:

A+ risk band: 6.0%
A risk band: 7.0%
B risk band: 8.0%
C risk band: 9.0%

Going forward we are committed to reviewing minimum bid rates on a monthly basis and providing two weeks’ notice of any future changes. This will ensure investors are aware in advance of any changes and there is minimal impact on market behaviour or an individual’s investment experience. Additionally, any future adjustments will be introduced incrementally at a maximum of 0.5% (+ or -) of the existing minimum bid rates across each risk band.

Samir, our CEO, and other team members will be discussing the minimum bid rate trial on the forum, and the rationale behind the decisions we took. If you have specific questions or would like to discuss this in more detail, please post a question and we will be happy to answer.

Alternative finance

July 1st, 2013

There once was a time when building societies were regarded as the alternative to banks.  These were mutual organisations - owned by their members - where savers could get a decent return.  Over the last two decades, the number of building societies have fallen as some demutualised (became banks or were taken oven by banks).  The financial crisis of provided an opportunity for peer-to-peer companies, as borrowers found access to capital harder to come by as banks tried to preserve capitol.  As lots of cheap money became available to try to encourage banks to lend again, the rates on offer to savers fell still further.

Building societies are not what they once were, with a lot operating like banks in all but name.  I recently received the annual statement from one such building society, which had made yet another annual loss, yet the CEO received more than 10% rise in remuneration from the previous year.  It is no wonder that finance has become so unpopular with the general public.

Peer-to-peer lending does allow individuals to readdress the balance with borrowers getting a market leading interest rate, and lenders receiving a return greater than they can with their bank or building society - provided the understand the potential risks.