Peer-to business lending started out with the ambition to be better than the banks, by being more open and transparent, more ethical, more dynamic and better for businesses and lenders alike. Since the early days of the industry, we’ve seen platforms come and go and there have been many changes to the way in which platforms operate.
Many platforms started off as marketplace lenders, arguably the most transparent of the P2P models, but over time many platforms have changed their models, today few platforms still offer real marketplace lending, and even fewer offer the level of transparency on which the industry built its foundations.
As a peer-to-business lending platform, we’ve tried to maintain and honour the ethos of transparency in everything we do, despite pressures from the market to change. Here we’ll take a look at what transparency is in P2B lending and why it might be important to lenders.
What is understood by ‘transparency’ in peer-to-business lending?
1. Know who you’re lending to
Knowing who you are lending to is central to transparency in the industry, it’s where the name ‘peer to peer’ was derived. It was intended to be meant literally, so that lent to businesses or people that they knew or at the very least could find out more about. Without an understanding of who you are lending, you are unable to clearly assess the risk of your investment.
2. Clear sight and access to loan book performance
In the absence of industry standard definitions on key terms such as ‘default and ‘net return’ to name but a few, the availability of a platforms loan book in a readable and downloadable format, is the only way in which many lenders are able to assess the performance of one platform against another, and in following their investments across a variety of platforms.
Many industry bodies and platforms have called upon the regulator to provide standard definitions for platforms, however these have not yet materialised. In the interim many platforms have made the decision to remove their downloadable loan books and reduce the frequency by which they update their statics pages, reducing the ability of investors to more easily compare like for like, muddying the once clearer waters.
3. Clear understanding of the rates at which you are lending at
By choosing the rate at which lenders want to lend at, lenders are firstly able to price the risk associated with lending to a particular borrower and secondly, know what rate the borrower is being made to pay.
Pricing risk is an important part of lending, as lenders are able to make a judgement call on the perceived level of risk and lend at an appropriate rate by accounting for the potential of default or late repayments.
Knowing the rate at which you are lending and the corresponding rate at which the borrower is borrowing, at is essential for transparency, without it lenders are not able to accurately make a risk decision on the borrower’s ability to repay.
This level of transparency can be found in marketplace lenders such as ourselves but is less obvious or completely hidden on platforms which promise a ‘target net return’, whereby platforms lend out lenders funds at a rate higher than the target return, and net the remainder of the interest, capitalising on the lenders risk.
4. Understand what the P2P Platform does and what you should do.
There are now a number of different types of P2P and P2B platforms, operating different types of models lending to different types of parties according to varying terms and conditions. On some P2P platforms lenders are not able to choose who they lend to nor the rate the lend at and are completely entrusted on the platforms due diligence and credit risk processes.
Transparency is important here because on platforms where lenders do not know who they are lending to nor the rate at which they are lending, it is far more difficult for individual lenders to monitor the true performance of their investment, particularly where they have ‘subscribed’ to a blended rate return, where their funds are lent out to variety of a different risked borrowers to achieve an average return.
Before lending on any platform it is important to understand what the platforms do on behalf of lenders and what you as a lender should do yourself.
Following their Post Implementation Review, of the P2P industry the Financial Services Conduct Authority (FCA) have released their initial findings and set out proposed changes to the industry, many of which are centered around the need for greater levels of transparency on the part of the platforms, to make it clearer to lenders how their funds are lent and what lenders should expect of the platform. Having previously simply just grouped the many varying types of platforms as P2P Lending Platforms the FCA has now made steps to more clearly distinguish between the different models, identifying three main types of platforms; Conduit Platforms, Pricing Platforms and Discretionary Platforms.
- Conduit Platforms: Are platforms where the lenders pick the borrowers they want to lend to and the rates at which they want to lend at and the platform administers the loan arrangements.
- Pricing Platforms: Are platforms that set the rate or price at which the lenders lend at, but lenders are still able to choose the loans they want to be a part of.
- Discretionary Platforms: Are those platforms that set the price and also choose the loans lenders will invest in on behalf of the lenders, creating a portfolio of loans for the lender to generate a target return.
So why is transparency so important to Peer-to-business lending?
Firstly, most P2P / P2B platforms do not risk their own capital on the loans, so therefore, lenders have the right, because they’ve fronted the money, to know how their money will be used, where the money will go and to whom they are lending. Without transparency, lenders might as well be depositing their funds into a savings or current account with a high street bank and be happy with the rate they receive for simply holding their money in a certain account type.
Transparency in P2B helps to align interests and allow lenders to manage their risk in a manner which suits them.
Secondly, transparency helps protect not only lenders but the industry. Through regular publication of a platform statistics and loan book data anyone making use of the data available, is able to clearly monitor the overall performance of a platforms loan book, and with it to some extent, the platforms health. Clearly platforms that have an ailing loan book, high defaults and average net returns below that expected by the market, run the risk of failure, which may result in a greater loss to lenders and other stakeholders in the platform. The ability to spot trends (both negative and positive) is key for investors protecting their assets.
Finally, transparency is the only means by which lenders and stakeholders in P2P and P2B platforms, are able to continually hold the platforms accountable. To date, the scandals that have surfaced in the industry have by and large been discovered due to the transparency of available to lenders and the public. Without the level of transparency that platforms set out with at the start, it will become increasingly difficult to uncover scandals, malpractice etc. before it results in considerable investor detriment. Therefore, the current trend by many platforms to gradually reduce the level of transparency available is arguably a worrying one, not only for investors but the industry as a whole.