Platforms shift to auto-lending as demand for diversification rises
AN INCREASING number of peer-to-peer lending platforms are turning their attention to automated lending as investor demand for simpler and more diversified offerings increases.
Last September, Funding Circle stopped offering manual lending and shifted to an entirely auto-lending model, meaning investors can no longer choose which businesses they lend to.
Ablrate, meanwhile, which has traditionally operated a self-select business model, launched a range of products at the start of this year which mirror the functionality of auto-lending.
Neil Faulkner, co-founder and managing director of 4th Way, the peer-to-peer analysis firm, said auto-lending is much easier for platforms to manage once they achieve serious scale, largely because less customer service is required.
But he said a more important reason for switching exclusively to auto-lending is concentration risk.
“Funding Circle, for example, has learned that even investors who have a lot of experience in other asset classes are simply not diversifying enough, which puts them in significant danger of earning unsatisfactory returns or even making losses,” he explained. “Automated lending is a tool for enforcing more sensible levels of diversification.”
A spokesperson for Funding Circle claimed the changes introduced last year have made lending simpler, better and fairer. “These changes have created a level playing field for all investors and ensured everyone has the same opportunity to lend to UK businesses.”
The spokesperson added that investors can choose a portfolio that suits their risk appetite, “making it even easier for them to earn stable, attractive returns”.
Part of the shift to auto-lending reflects growing investor appetite for simpler offerings. Auto-lending requires less due diligence than manual lending because investors do not have to research individual borrowers or individual loan terms.
David Bradley-Ward, chief executive of Ablrate, said the launch of its Diversified Portfolio Loan (DPL) product was in response to customer requests for auto-lending as well as the platform’s desire for greater loan flexibility.
Ablrate has previously had to turn down loans because they did not fit its fixed term, fixed cost model – for example, they were loans of less than £200,000 or short-dated.
“We have placed one of these DPL products, but it was withdrawn after the borrower received a large equity injection and took out all borrowers. However, it proved the model with the first £300,000 filling in a few hours. The exercise was very useful, we got some great feedback from lenders and the next batch of loans, due shortly, will benefit from that feedback,” Bradley-Ward added.
Among the platforms who offer both automated and manual lending options, auto-lending is far more popular.
Stuart Law, chief executive at Assetz Capital, said the ratio of auto to manual lending is around two-to-one in terms of the value invested.
He said auto-lending is simpler and takes less time, however returns tend to be lower than Assetz Capital’s average return of 6.5 per cent (net of losses) over the last 12 months.
“We choose to appeal to both type of investors rather than force people to choose,” Law added.