Funding Circle’s chief executive and co-founder Samir Desai would be forgiven for taking his foot off the pedal after leading the company’s stratospheric growth over the past seven years. But he is just getting started…
As chief executive and co-founder of Funding Circle, in seven years Samir Desai has gone from snapping at the heels of the banks to boss of the third-biggest small business lender in the UK. But he’s still every inch the restless entrepreneur, as frustrated by the failings of big banks – and as determined to be a better lender to small businesses – as he was when Funding Circle first opened its doors back in 2010.
“We’re still very focussed on providing a simple product to businesses that need faster, cheaper better loans on the one hand, and on the other providing investors with access to good returns,” he says. “We have a long track record of doing both now. “It’s very empowering when I talk to borrowers, because they are just like us – they talk about their businesses and they care, they are passionate. That’s why they like to deal with us.”
They certainly seem to – Funding Circle has made loans totalling £2.7bn to date, matching around 70,000 investors with nearly 28,000 small business borrowers. As anyone who saw him on the platform at the LendIt Europe conference in October would attest, he’s a feisty character who lost few opportunities to hold his fellow panellists – representing RBS’s Esme platform and Lloyd’s – to account, over everything from the cost of capital to the app-ification of small business finance and reaping the spoils of AI.
Understanding and implementing the latest AI techniques is going to be a critical driver of future competitiveness, he reckons.
“How much of an advantage will that be? My guess is that it’s going to be huge, because wherever we have used them in parts of our business they have radically transformed what we’re doing,” he says.
Peer-to-peer lending platforms like Funding Circle are much better placed to do this than banks, he says – and not only for the usual small-versus-big-business reasons of agility and innovation. It’s also a consequence of the regulatory environment for banks, especially given the huge taxpayer bailouts many have required since the crash of 2008.
“The ability of banks to use deep learning, or even traditional machine learning techniques, is pretty limited,” he asserts. “Because if you’re a regulator you need to understand every bit of the way a bank’s capital model is calculated, and that will massively limit their ability to use the latest techniques.
“It’s the same in any market where the taxpayer stands behind it; it’s right that banks shouldn’t be able to use these tools in the way that asset managers and platforms can.”
By contrast, he says, P2P platforms have no taxpayer-guaranteed safety net, and no capital models to be picked over and approved. Given their relatively small size and the lack of leverage, they thus offer a potential ‘safe space’ in which novel techniques can be trialled and understood, both by the platforms themselves and the regulators. And that’s just one aspect of the tech transformation that is about to overtake small business finance.
Like so much else in modern life, he says, it’s going to become app-ified. “I don’t know how you manage your finances, but on my phone I have Funding Circle [for investors currently, but an app for borrowers is on the way] I have other funding apps like Vanguard IG and I have TransferWise to send money,” Desai comments.“One of my apps is my current account too, but I don’t do much there apart from check my balance and pay people.
“When you can switch between them with a few clicks, there’s no point in having a one-stop shop. We don’t need to get our mortgages from the same place that we get insurance or a current account. In a pre-internet, pre-mobile world it probably made sense to have a one-stop shop, but if banks didn’t exist today you wouldn’t invent them.”
But what about growth?
The view that P2P players will have to become more bank-like and embrace balance sheet funding to achieve scale and reduce cost of capital is increasingly prevalent, not least in the US where Funding Circle has expanded its business. Closer to home of course, Zopa, viewed by many as the ‘other’ poster child for P2P, in consumer rather than SME lending, has gone for the ‘if you can’t beat them, join them’ approach and is launching a bank.
You won’t find any banking licence application forms lurking on Desai’s desk. “We won’t become a bank as long as I am around,” he says unhesitatingly. “I don’t get the cost of capital argument. How long do people believe in a model where a bank is worth the equity on its balance sheet? At some point the banks will have to increase their return on equity. Cost of capital is not a big advantage to banks, or if it is it won’t be for long.”
By contrast the platform model is simple, scalable and keeps Funding Circle’s interests aligned with those of their investors. “We are committed to the platform model and we care about our track record and performance, because it’s the only way we can raise more investment to do more loans,” Desai adds. “That’s very powerful.”
The only exception to the ‘no balance sheet rule’ will be when they first set up shop in new countries.
“In new geographies there is a period where we may lend our own money out, because we have learned that it is the best way to test them,” he explains. “But once you have done that research and development, the platform model is more efficient and better.”
Especially when it comes to achieving scale – something that is close to his heart. “There are only a few platforms of scale, but there are huge benefits,” he says. “Investors want scale, and liquidity concentrates to the largest players.”
Scale is expensive, but the fact that the Funding Circle group was still loss-making in its most recent annual results has not deterred its backers, which include Index Ventures and Carphone Warehouse founder Charles Dunstone. They have bankrolled the business to the tune of over £300m, including an £82m fundraising in January 2017 led by Accel Partners.
Rather than complicated debates about financing models, Funding Circle’s secret sauce is focus, he says: having a simple proposition that is repeatable in new markets, that meets borrowers’ needs and that investors can understand.
“We’re in four markets [UK, Germany, the US and the Netherlands] and we’d like to enter more,” Desai explains. “Everyone else has taken the approach of doing lots of different products in one market; we do the same product but in lots of different countries. Ours is a better model because you get huge synergies on the investor side – if they trust you in one market, they are willing to invest in others.”
It’s that strategy, he says, which has led to two of Funding Circle’s more controversial recent decisions – to wind down its property lending business and to remove the manual lending option for its investors.
“Property was a good part of the business, but we only did it in the UK,” he explains. “We felt we should focus and simplify. As Steve Jobs said, focus is about what you say “no” to.”
So the move wasn’t down to concerns that Funding Circle’s property loans were going into default, because property is such a boom and bust sector? “It is cyclical but we were comfortable with that and so were our investors,” Desai replies.
On the decision purely to offer auto-bid investments, he recognises that some veteran DIY investors may not be happy that the self-managed approach they have been using for years has been taken away from them. But the advantages are worth a few grumbles.
“We looked at what people do rather than what they say – 80 per cent of new investors were signing up to autobid,” he states. “And it is much faster – loans now get funded in five minutes, and the time to sell is much quicker too – investors can typically get access to their money in 20 minutes.”
Besides, those DIY investors who thought they could beat the system were deluding themselves, he adds. “We were never able to find an individual investor on either the retail or institutional side who could outperform our models,” he asserts. “The reason is that on the platform we are allowed to disclose 30 factors, whereas our models use 2,000 factors. Things like consumer credit data and bank statements, information we are not allowed to disclose for obvious reasons.”
With economic growth prospects darkening under the shadow of Brexit – UK GDP grew at only 0.3 per cent in the third quarter and inflation is up to 2.9 per cent – some P2P sceptics are claiming that a slowdown is coming and that, as Warren Buffet might say, the tide is about to go out and reveal those who have been swimming naked.
But the fact that P2P as an industry has yet to endure the downside of a credit cycle is overplayed, Desai argues. “It’s a bigger issue in the press than it is for investors,” he says. “We have done deals with incredibly sophisticated investors, they have done their maths and they can see that in Funding Circle the loss rates are about two per cent and the net yield is seven per cent in the UK.” Hard times could even be the making of the business, because good loans will outperform other asset classes.
“You can see on the website that we expect losses to double in a similar downturn [to the one in 2008],” he adds. “And even if they treble, you’ll still be getting a decent return.” So as Funding Circle heads towards its eighth year of lending, what is the next big milestone in his sights? “We want to get to £100bn a year of new lending, which would create three million new jobs a year,” he says.
You can hardly accuse him of lacking ambition. How long that might take is another question of course. “Who knows? We’re 70 times bigger than we were seven years ago,” he says. Our growth will probably be a bit slower than that, but then we only need to get 40 times bigger.” However long it takes, it’s certain that Desai will go the distance.