Thanks to our friends at the crowdfunding intelligence platform, Another Crowd, for a measured response to criticism – some of it justified, some just plain daft – of the peer-to-peer business lending sub-sector of crowdfunding. We reproduce Another Crowd’s most recent article in full:
“The financial press is asking difficult questions about US marketplace lenders’ business models. Are Wall Street’s favourites heading for a fall? What does that mean for the UK peer-to-peer lenders?
“Another Crowd unpicks the Financial Times’ ‘doomsday extrapolations’ and concludes the typical British SME could teach America’s banking sector a few lessons in how to run a business.
“This is our response to an article in today’s Financial Times headed ‘US peer-to-peer lending model has parallels with subprime crisis’. If you have a subscription, you can click the link to read the full article.
Here are some of the key assertions, with our responses.
“Credit Quality Of Some Loans Is Triggering Concerns”
Lesson: Well, good. The sub-prime crisis happened because nobody cared about credit quality. Banks thought they could buy contracts that hedged (read: cancel out) the risks they were taking. The first rule of peer-to-peer is to price it properly.
”An Innovation Born Out Of Crisis May Struggle As Conditions Normalise”
Lesson: You mean you thought the initial conditions would last forever? They won’t. That doesn’t happen in any sector, and this is supposed to be disruptive innovation. As an investor, ask hard questions, and don’t settle for soft answers.
Again, price it properly. You should always expect your business to make money off paying customers, not from ‘hedge’ contracts, or accurately guessing the future.
”Platforms Receive As Much As 90 Per Cent Of Their Fees On New Loans”
That could be difficult. But if you issue loans with terms of several years, and earn your fees at the start, you need to keep money in reserve for expenses incurred later on. Every SME does this. It’s not brain surgery.
“P2P Platforms, Like The Originators Of Subprime Mortgages — And The Banks That Repackaged Them — Have No ‘Skin In The Game’.”
We’d just point out that the originators DID, in fact, have skin in the game. They had incentives to sell at stupid, unsustainable discounts, and many of them had fancy mathematical models that told them their exposure was minimal, but they were lending money on people’s homes.
And the reason the crisis took down most of Wall Street was that a lot of other people. turned out to have ‘skin in the game’ which their mathematical models told them (incorrectly) would never go bad.
Lesson: Do your own due diligence. Share your data with others. And if you can’t understand it, back away.
“A Very Wall Street Fuss Is Rattling An Industry That Was Meant To Be The Antithesis Of Wall Street”
Lesson: We’re going to focus on that word ‘repackaged’. At the heart of every useful investment transaction is something simple that can be explained in human terms. That doesn’t stop banks and financial institutions ‘repackaging’ them into a form that you could no sooner unpackage than you could turn a burger back into a cow – or was it a horse?
The P2P revolution is about returning human values to the world of finance, and making it more transparent and understandable. Wall Street hasn’t changed its game in the last 8 – 10 years.
All the more reason to build better businesses, and not to do business with any business you can’t understand.”
Money&Co. has a number of loans in the pipeline. Our loans are only offered if our borrowers are free of all other debt, and have a track record of sustained profit. Moreover, Money&Co. takes a charge on the assets of the company, which is exercisable if a borrower defaults. The relevant assets could then be sold and used to reimburse lenders. As yet, after two years’ trading, no borrowers are in default. See our recent article on Money&Co.’s conservative attitude to vetting deals.
That said, remember that when lending, capital is at risk. Please see risk warnings on our Home, Lend and FAQ pages and elsewhere on this site.