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Peer2Peer Finance News | August 18, 2019

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Risk and Reward

Risk and Reward
Suzie Neuwirth

What Kevin Allen doesn’t know about credit risk isn’t worth knowing. The Money Platform’s new chief risk officer talks to Peer-to-Peer Finance News about being an early adopter, his time at RateSetter and finding a gap in the short-term lending market…

“We sometimes forget in our liberal-elite bubble of London that there are people who don’t earn a lot of money,” asserts Kevin Allen, the recently-appointed chief risk officer of The Money Platform.

“If that person’s boiler breaks and they’ve got to find £750, the sad truth is that a large percentage of the UK population doesn’t have £750 lying around.

“Those people don’t have prime credit ratings because they don’t have a lot of credit, but they certainly don’t have negative credit.”

This is where Allen sees a gap in the market for The Money Platform, which is the first fully-authorised peer-to-peer payday lender. Allen, a self-declared socialist, is clearly motivated by the idea of providing easier – and more affordable – access to credit for the wider population.

Read more: Payday loan requests double in first week of January

Allen has worked in risk management for the consumer lending sector throughout his career. After holding credit risk roles at a number of blue-chip firms including MasterCard and LloydsTSB, he joined RateSetter, where he became their first chief risk officer and spent three-and-a-half years shaping the platform’s credit decision strategy.

Allen is an exceptionally early adopter of P2P and was one of Zopa’s founding lenders, so moving into a career in the sector was an attractive prospect for him.

“I got a call from a recruitment agent and he said, ‘it’s not for you, Kevin, but there’s this crazy little P2P lending company called RateSetter. Great set-up’,” Allen reminisces.

“As soon as he said that I said, ‘that’s going to be my job, I want that job’. So I met [RateSetter’s co-founders] Pete Behrens and Rhydian Lewis and got on really well with them.

“I think they thought yep, got a personal connection there, he knows risk management and he’s also a P2P lender. That’s just nuts. 500 people in the world were lending at the time and you’ve got this guy.

“It was a small company at the time, I was staff number 14, they were lending a couple of million pounds a month, the vast majority of the world had never heard of P2P and there certainly wasn’t a magazine like Peer-to-Peer Finance News.”

During his time at RateSetter, the platform grew from £2m-£3m a month of lending up to £60m a month, while the provision fund grew from around £600,000 to more than £20m.

Read more: RateSetter’s borrowers have paid back £1bn

“It was a great journey and I thoroughly enjoyed it, but I got the bug for building something new,” said Allen. “I don’t think I could ever go back to a blue chip.”

The Money Platform was recommended to Allen by a friend, so he went for a chat with the lenders’ co-founders, Charles Balcombe and Joshua Graham, and liked what he heard.

“It’s very impressive, what they’ve done,” he says. “The Money Platform has been incubated by the Financial Conduct Authority (FCA), so they’re fully FCA-authorised, which amazingly is more than you can say of Zopa, RateSetter and Funding Circle.”

Read more: RateSetter bolsters risk team with PayPal’s Michael Hoare          

In comparison to some of the big-name payday lenders in the market, The Money Platform offers a relatively low representative APR of 165 per cent. Loan terms range from three weeks to 12 weeks and the maximum loan size is £1,000.

“The Money Platform is not sub-prime or pay-day, it’s short-term lending,” says Allen. “There’s definitely a gap in the P2P market for that.”

Allen is adamant that he is not trying to turn The Money Platform into RateSetter 2.0. The two companies have very different profiles, he explains.

“RateSetter very clearly has a target borrower, which is low risk,” he says. “The defaults they’re looking for is a certain percentage in the low single digits. They would want to be the first P2P platform that someone would lend on. The Money Platform is never going to be either of those things.”

The Money Platform’s investors can expect returns of around 12 per cent, but of course, that reward comes with a risk.

“I wouldn’t necessarily recommend lending on The Money Platform to some of my more risk-averse friends or my family,” Allen continues. “It’s a platform you go to when you’ve got quite a diverse range of investments already. You’ve probably already got savings, premium bonds, some equities, you probably already lend on one or two of the large P2P platforms and you want to diversify further and aim for a higher return.”

However, one area where The Money Platform is aligned with the larger platforms is that it faces the challenge of finding suitable borrowers. A number of platforms and commentators have predicted that this will be a key issue for the sector this year, partly due to an influx of yield-hungry investors in a low interest rate environment.

Read more: Zopa stops taking new money transfers

Read more: MoneyThing faces shortage of borrowers          

The Money Platform is lumped together with other payday lenders on comparison sites, which is both an asset and a disadvantage, Allen explains.

“The Money Platform is much, much cheaper for borrowers, so we are top of the charts on any affiliates where we are on the tab for pay day,” he says.

“The problem is, of course, that the people applying tend to be your payday, sub-prime typical borrowers with impaired credit.

“Therefore our approval rates at the moment are very low. We’re looking for the type of customer where they’ve got clean credit, they just don’t have a lot of savings.

“So that’s the issue at the moment, finding that niche of borrower, because there isn’t really an obvious place where those people go.”

It is clear that Allen relishes the challenge of building up a new P2P platform. He concedes that there is “an awful lot of work to do…credit policy, product, collections, payments”, but he evidently has a lot of respect for the business model and the team.

“It’s so far from a finished product,” he says, “but it’s exciting, it’s good, I’m enjoying it.”

Allen on…

…the future of P2P

“Recession or no recession, a lot of platforms will close in the next 24 months because they’re not going to achieve scale. It’s not as easy money as all these venture capital backers perhaps thought it was going to be. Some of these platforms are lending next to nothing every month. That’s not sustainable.

“Lenders should make sure they are choosing platforms with strong balance sheets. When a recession comes, returns will inevitably reduce because the bad debts will go up and your returns are going to come down.

“However, I think the bigger issue is that new money won’t go on to the platforms, because the perceived risk will be so much higher.

“As a result, platforms will be forced to offer higher returns, which will mean they won’t be able to do as many loans, so they will have liquidity issues. Some of the platforms will struggle to be profitable and some will close because of that.

“So I think the recession will just filter out the weaker players, which is no bad thing, because there are too many platforms. But I think the larger, solid balance sheet platforms will continue to thrive.”