WHAT IS MARKETPLACE LENDING? Marketplace lending is a method of debt financing that enables individuals and businesses to borrow and lend money without the use of a mainstream financial intermediary. Because marketplace lending removes the middleman from the process, it often gives borrowers access to finance that they may not have otherwise been approved for by high street banks. There is a clear distinction between equity and debt-based platforms. The equity model (usually referred to as crowdfunding) allows consumers to invest directly into a business in exchange for shares, only allowing them to exit when the business is sold or listed on the stock exchange.

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MARKETPLACE LENDING: LEVERAGING FOR INNOVATION

TECH CITY NEWS ROUNDTABLE

Presented by LendInvest

In the debt-based marketplace lending model, money is lent from an investor to a business or individual and repaid at the end of the term (the timescale of which varies deal by deal). It is a fast-growing industry: according to research by innovation charity NESTA, the marketplace lending industry is doubling in size every six months. The Liberum AltFi Index, published in January, also shows that more than £1bn has been funded via UK marketplace lending platforms to date, which could jump to £45bn within a decade. The largest marketplace lending lending sites in the UK today are Funding Circle, RateSetter, Zopa and and LendInvest.

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ROUNDTABLE ATTENDEES

David Serafini – Lend Invest

Christian Faes – Lend Invest

Julia Groves – UK Crowdfunding Association

Alasdair McPherson – Chalk Hill Partners

Andy Davis – Freelance journalist

Cormac Leech – Liberum

Eddie George – New Finance

Tom Bull – EY

MARKETPLACE LENDING: LEADING FINTECH INNOVATION Innovation was the first theme discussed at the roundtable: not only which innovations we can expect from the industry, but also how other industries could react. Without a doubt, marketplace lending is innovative: it is challenging existing financial structures to disrupt the market. Marketplace lending is helping to fill a finance gap that has been exacerbated throughout the last seven years, since the fall of Lehman Brothers. Banks are failing to lend, yet businesses still require growth capital. Through marketplace lending, many perfectly solvent businesses and individuals have accessed finance which they otherwise would not have obtained. The roundtable attendees highlighted how innovation in marketplace lending has not just been in the financial product on offer, but also in how it has been marketed and sold to the wider public.

“Some of the technology innovation on the lending side of the platforms has been fabulous, but so has the innovation in access to new financial products which, as an investor, you have never had access to before,” explained Tom Bull, assistant director at EY. “The innovation has not been just pure technology. The innovation has also been in the mindset of the entrepreneurs so that the sector has been totally customer focused.”

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Christian Faes, managing partner of Montello Capital and co-founder of LendInvest, a marketplace lending mortgage platform, agreed: “One of the most difficult things to do is to try and make the process simple. You have to take something relatively complex and narrow it down so that the whole user experience and journey feels simple and trustworthy. There is a real art to it and a lot of innovation is coming out of that.”

Is the innovation leading to institutional capital investing in the space? The table did not think so. “Whether something is innovative or whether it makes a good investment are two different things,” Faes said. This could be because of a dearth of venture capitalists who are focused on the financial technology sector, more generally. But for Eddie George, founder and CEO of New Finance, the innovation angle should not matter to VCs: “Why are VCs asking for innovation, anyway? Are they even able to measure it? Surely they should be just looking for investable businesses. Innovation in marketplace lending is still in its early days.”

HOW ARE THE BANKS REACTING TO THE RISE OF MARKETPLACE LENDING? This innovation has led the industry to come under closer scrutiny by its closest competitor, the banking industry. Despite marketplace lending still representing just a small slice of the finance industry overall, many banks in the UK are beginning to view marketplace lending as a potential threat to their business model.

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Indeed, marketplace lending essentially exists to cut out the financial intermediary in loans, which is also one of its primary appeals to individual investors and borrowers. How are the banks reacting to the industry’s fast growth? The table agreed that banks are keeping an eye on marketplace lending platforms, but some panellists believed the banks would be unable to replicate the marketplace lending model due to their existing business lines and structure. George explained: “In game theory, it’s called entrenched player syndrome. The banks would need to cannibalise their own revenue streams in order to pivot and move forward; we’ll have to wait and see if they will do that.” However, as the marketplace lending market develops and becomes a more important threat to the existing financial infrastructure, this could change. A general timeframe of three to five years was suggested before the banks will have the capability to react to peer-to-peer. “Today, the risk-reward ratio just isn’t there for bankers,” said Cormac Leech, bank equity research leader at Liberum. “That’s a clear reason why the banks won’t really get into marketplace lending in a big way for quite a while: it would result in a huge loss of profit.”

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The table agreed that rather than trying to replicate the marketplace lending model themselves, what would be more likely is for banks to eventually acquire existing marketplace lending platforms to enter the industry.

THE NEW FRONTIER: ISAs AND ANNUITIES Andy Davis, a former Financial Times journalist now working freelance, suggested that while the immediate threat of marketplace lending may be to the banks, in the longer term it posed a threat to other financial sectors such as the asset management industry. Indeed, in the latest Budget, the Chancellor of the Exchequer announced measures that gave the marketplace lending industry a big boost while stepping on the traditional financial industry’s toes.

First, pensioners will no longer be required to buy annuities (an annuity is a financial product in which a financial institution invests and pays out a stream of payments to an individual, usually throughout their retirement years). This means that people will be able to take a larger lump sum payment out of their pension, with the freedom to invest it elsewhere, for example on marketplace lending platforms. This is where marketplace lending becomes a threat to the asset management industry. "Look at what's about to happen to the annuity market. Billions of pounds of people's savings are going to be up for grabs and the people who will want to hold on to the money that would have gone into

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annuities will be those who’ve got it, which is asset managers,” said Davis, adding that £14bn is annuitised each year. “But what the marketplace lending industry wants to do is offer more investment choices that are wider, perhaps, than what is currently on offer by asset managers, and over time I think marketplace lending can become a rival to traditional asset managers.”

Second, George Osborne announced new rules that will allow Marketplace loans to be included in tax-free ISAs (Individual Savings Accounts). This is a huge market which offers an important

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opportunity for marketplace lending platforms: some £57bn is invested by British adults into ISAs every year. “ISAs are absolutely fundamental to the growth of the industry,” said Julia Groves, founding chair of the UK Crowdfunding Association. “ISAs are held by 22 million people and represent £460bn of capital. Half of this is currently in stocks and shares, so even if marketplace lending gets just a couple of per cent, that is still a significant market.”For Alasdair McPherson, an angel investor and tech enthusiast who is a partner at Chalkhill Partners, these announcements should be welcomed by the marketplace lending industry. “Bizarrely, this is an example of the government innovating for us,” he explained. “The average annuity in the UK is just £25,000 – not hundreds of thousands – so people are not going to want to keep an annuity, they will want to take the cash and invest in platforms just like LendInvest.”

THE RISE OF MARKETPLACE MORTGAGES The changes introduced by Osborne, which will see a significant amount of capital flow to marketplace lending platforms, positions mortgage marketplace platform LendInvest in a particularly strong position, the table agreed.

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Liberum’s Leech said that marketplace mortgages would be ideal for ISA money. “As marketplace lending becomes ISA-able, there is going to be a wall of money coming. There needs to be a loan segment for this, which I think is mortgages. It’s a £1.2tn market – mortgages could take off.” LendInvest’s business in particular will be able to capitalise on the opportunity. The platform was the world’s first mortgage marketplace lending platform and has already completed £36m worth of loans (April 2014), making it the largest player. As it can demonstrate a track record of success, the platform can be expected to appeal to investors, said the attendees. “We offer secured lending,” said David Serafini, managing director of LendInvest. “If you match our proposition with any other marketplace lending proposition, over a 20-year period, we can guarantee fewer defaults and a better return. “There is simply no writing off of bad debts: we pursue and recover 100 per cent of the capital through our underwriting abilities, our independent relationships and our insurance protection.”

Faes, LendInvest’s co-founder, also added that it’s a market in which experience is key. “You can’t just be a bunch of techies in a room and decide to do mortgage lending, because you will get it wrong at one stage or another. The technology is what wraps our business up, but what we’re wrapping up is a lending business.”

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Yet for LendInvest – and the wider marketplace lending industry – to fully benefit from the new ISA rules, the table said the platforms would need to step up. “The ISA brand is very powerful,” said Groves. “The constraint will not be with the lenders, but in the platform’s abilities to get the deal flow of the right quality into the market.”

GETTING BRITAIN INTERESTED IN MARKETPLACE LENDING While the opportunity for marketplace lending is certainly large, there was no agreement over whether marketplace lending can already be considered a mainstream product. The industry remains relatively small; the table estimated that between 150,000 and 200,000 people across Britain are engaged with marketplace lending overall. Groves insisted that marketplace lending was, in fact, fast becoming mainstream, simply because of the scale of opportunity that ISAs offer. She said that you could not get more mainstream than an ISA product, but Davis countered that while around 11m people do hold stocks and shares ISAs, only a tiny fraction are in fact knowledgeable and comfortable with marketplace lending. “There are orders of magnitude of difference between the two,” he said. “Marketplace lending being considered mainstream is still a long way away.”

There was also the issue of what percentage of the British population has the appetite to invest. This is only a fraction of the population, but as the general public becomes more knowledgeable and comfortable with marketplace lending, so will the public’s appetite for investment, the table said. One way to get the UK more interested in marketplace lending would be for existing, recognised institutions to lend alongside individuals suggested Groves. “If every pound you put into something was matched by an institution, it would boost lender confidence and give a strong brand endorsement,” she said. Serafini agreed, saying that the notion of having “skin in the game” would be appreciated by individuals. “It would be a stamp of approval. If you could see who was backing certain loans – whether that be an institution or individuals that people know or recognise – it would reassure the potential investor base.”

Should the industry succeed in creating and meeting demand, it will become a major contender to the current banking system and that, the whole table agreed, would be a good thing for Britain.

INTERESTED IN ATTENDING OR HOSTING A FUTURE ROUNDTABLE?

We hold roundtables every month on topics including immigration law, cloud computing, recruitment and connectivity.

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We’re always interested in hosting new debates, to find out more contact Becky Golland: becky@techcitynews.com or call 0207 502 8220

LENDINVEST & TECH CITY

LendInvest is secured marketplace lending for residential and commercial mortgages. All loans on the LendInvest platform are secured by a registered legal charge against property in the UK.

The principals behind LendInvest come from top-tier backgrounds in law, property, banking and finance. The company has been founded by two principals from Montello Capital Partners, which is one of the leading real estate lenders in London.

LendInvest has been set up and is run day-to-day by people with real world lending experience. It also has the benefit of some of the most sophisticated fraud detection and underwriting processes in the market; and access to substantial deal-flow (between £50million to £100million each month) which allows LendInvest to select superior lending opportunities for investors.

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