Friday, 2 September 2016

P2P lending risks and rewards

related pages about P2P lending 

Moneywise wrote a page putting people off investments in Funding Knight and others under a "ones to avoid" heading. The article is no longer online; this is a better one with the same time.

P2P lending risks and rewards (scroll down for rewards)

After a few weeks of wanting to write some kind of blog post about P2P, there are a couple of triggers.
  • Bondora ring-up and email and avertise to suit the shareholders in their business, while their P2P lenders are let-down. Nobody comments.
  • Funding Knight is a bit quiet and short of new loans after letting-down the investors who helped fund their office and salaries, but it still does a good job for lenders. This has put journalists at Moneywise into a panic and they have warned lenders not to take-part.

Lending on P2P sites is partly an emotional choice. You decide to take a little flutter, and then more, but spread the risk. You glance at a few facts about the loan if you have time, just to avoid feeling silly if it goes wrong and it's a big one. A few bad experiences persuade you to avoid certain types of lending in future or to keep them on a small scale. Generally, in my experience, the results are much better than shares and bank accounts, and sometimes more socially useful. The only problem is how to encourage other people to enjoy the same results without annoying those with no money to invest and without sounding like a sales rep.

I should start with the bad news by saying what's wrong with Bondora, even though it has no stack of licences or big number of lenders in the UK. Bondora management used to be a thrifty cautious bunch, but sounded as though they had swallowed a textbook about ending their "bootstrapping" and reaching a tipping point at which equity finance could help them expand to a new level. This is a very very bad idea for companies that lend; it forces them to take uncomfortable risks. Fundingcircle suffered the same process in the UK with Alex Moulton's equity finance company pushing them into ever bigger and riskier loans.
Clicking-around on the internet, you find reports by disgruntled Bondora lenders message boards like and now even in the Financial Times .

Bondora's estimated future returns are in double figures; reality is 2.68%
Bondora's estimated current value of my loans are €5,730; reality is €8 today

So that's the glum news.
There is a huge amount of extra detail now on the Bondora site, with videos and technical jargon, but, frankly, I have seen enough. There was also a head of investor relations, presumably on a high salary that adds to cots. You can look it up because he quit and they're advertising the job -

Moneywise on Funding Knight changing ownership, which really is fine; it doesn't matter.

"putting 900 savers’ money at risk"

Funding Knight's statement about change is much like any other P2P lender:

"In the event that FundingKnight ceases to trade, we have appointed Complete Cash Management Limited to administer the collection of loan repayments and apportion them to the relevant investors. You will continue to receive the interest and capital payments due to you."

"Any un-invested funds held in your investor account are held by our bank in a designated client account and ring-fenced from the assets of FundingKnight. These funds would therefore continue to be separate from FundingKnight Ltd and not available to its creditors."

Reasons to believe Funding Knight and not Moneywise:

(1) Experience

I lend about £100 on any P2P platform that seems to offer a good return over 10% and have invested over a dozen. (Except Bondora where I lent too much). They don't close, raid the client account, and leave remaining loans un-collected. It simply doesn't happen. Fundingknight got me about 11½% with their auto-lend system, now dropped to 9½% while they've had less staff to recover bad loans and get new ones. Rebuildingsociety, on which I lend with my own rough hunches as well as auto-lend, got me 8% at minimum now risen back to 12½%. The rough hunches are often to invest at 20% as well as lower rates, and hope that the 20% bids are among the winning ones.

The only one that seemed to loose money from the client account was Quakle, a tiny social enterprise that offered consumer credit without credit checks. I don't know how much went missing from the client account towards winding-up costs - possibly none - but the site dissapeared offline a few weeks after ceasing to take-on new business with nothing but an email address for explanation. I think that anyone investing, like myself, could see that it was a pretty strange idea, and knew that there was no Financial Conduct Authority regulation of P2P lending at the time. That's why I only invested about £50, and I doubt anyone else invested more.

Bondora has a few thousand euro of my cash listed in un-salable loans and a quoted return of 3% at the moment, because I have turned auto-lend off and withdraw when possible.

In contrast, 20 other P2P lenders have simply ceased to take-on new lenders, failed to start taking-on business, or merged into rival companies, as you would expect in a new market. Here is a list:

The only similar companies to Quakle trading today are the bitcoin P2P lending markets, which have software and people interested in lending and borrowing, but not many borrowers who look plausible and evidence-based in their requests. The options are to wait, or to invest one bitcoin on the most slick-looking platform, which I think is Bitbond, and see how it goes by investing the minimum amount that can be invested whenever cash comes-back in repayments. I would like to this but their ID recognition system has just changed, but I hope to get back into the habit after re-proving my ID. So far, there is some turnover of money but my loans are still too young to judge. The platform itself is odd too. Slick and well-funded by venture capitalists, I guess that some of this money goes towards pretend loans placed just to make the site look busy. When that money runs out and more of the other kinds of borrowers take-over, then returns may fall, and whenever the people running the sites learn how the market works and what debts are collectable, returns may rise.

An old Funding Knight borrower has just asked for a new loan and dozens of current lenders have bid to fund it, so I am not the only one who thinks this platform is still worth using.Funding Knight has a very good web site for presenting data, which I suppose it what keeps the lenders lending. It tells me that I have earned just under 10% on new loans and just over 10% on second-hand loans bought on the after-market, mainly with their auto-bid system set to re-invest my earnings.

(2) References regulatory checks and reviews

These include interim licencing from the Financial Conduct Authority, and membership of trade associations that have minimum standards for members. Lenders on the site are free to post on public message boards, with their detailed knowledge of individual loans that the company has offered - which is a far more transparent system than applies to banks. Lenders can also check prospective borrowers against as well as reading the detailed story that's offered behind each loan request. If I take the first loan, alphabetically, on my list of loans I see that it's descibed as "above average risk" and "lower than average equifax credit score".  I only bought £30-worth with the auto-lending robot, but the people who bought more asked eight earnest questions on a message board while the loan was auctioned, and read a more detailed breakdown of what the assets are. Stock has no value because the business is a school, but are other assets apparently. The blackboards or "tangeble assets" are valued at £792,374 which looks high. If I were investing hundreds, I would check all the questions that lenders have asked and the replies. Someone probably asked about the assets, and got a reply.

There are regular articles about Funding Knight on sites like P2Pmoney.  So, without knowing how to check the contract between Funding Kight and Complete Cash Managment or how it would work in practice, I think I can trust that it would work. It may be in place at the moment: Funding Knight hasn't posted any new loans for a while, but if one came-up, I'd consider investing.

Nothing much - just wondering how to price risk

I suppose that a 50% instant risk of total loss is worth 200% instant interest to a robot with money to spare and no costs, or a hobbyist like a mild gambler.

Anything more complicated, I find, is better expressed in some form like building-blocks than algebra, but one more layer of complication might be worth a shot.

I suppose that a typical risk on a P2P lending site is that loan will fizzle-out to less value after a while. I would like to see this expressed as building blocks but here is an example. A loan defaults after one year and there is nothing to recover. Supposing I am a person who invests other cash at about zero percent in a deposit account, and has money to spare, does this for fun, then I suppose this is the same as it happening tomorrow; if half of loans do this I want to earn double my investment on all the ones that pay.

I must come back to this.

Rewards over 10%

I did found calculators for internal rate of return and applied them to Property Moose estimates of how much will come back as rent and how much as capital gain after three years, and the result was under 9% so I'm taking money out.

I do see measures of the percentage I am making on loans to small business, which vary a lot in results. These are higher and have an extra benefit of encouraging employment and tax-paying in the economy where I live. is a blog post about the less useful but high-paying sites that fund bridging loans and maybe the odd second mortgage. I've found similar results.

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