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Peer2Peer Finance News | November 14, 2018

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Consumer champion

Consumer champion
Andrew Saunders

RateSetter’s chief product officer turned chief investments officer Mario Lupori is passionate about the platform’s drive to bring P2P to the people. He talks to Andrew Saunders about RateSetter’s unique model, the impact of a downturn and how the Innovative Finance ISA captured his imagination…

AT LEAST IN COMPARISON with its other ‘big three’ rivals, you could be forgiven for thinking that RateSetter is enjoying a fairly quiet time of it at the moment. It hasn’t just been through a landmark stock market flotation like Funding Circle, and nor it is busy turning itself into a bank, like Zopa.

But appearances can be deceptive, says Mario Lupori, who was chief product officer at RateSetter but moved into the newly-created role of chief investments officer at the start of November. Like the proverbial swan, apparent serenity above the waterline can disguise vigorous paddling below it.

“We’ve had a record summer for new lending, and that is continuing,” he says. “October might be another record month for us.”

So while others may have been distracted by major transitions, RateSetter – which stands out in the P2P sector due to its eponymous rate-setting model, its investor-safeguarding provision fund and its almost total lack of institutional funding – has been able to remain focussed instead on simply doing more and better business.

With lending rates hitting over six per cent on the platform’s five-year market – the highest since 2015 – and cumulative loan originations for July, August and September of £197m, investor demand certainly does appear to be brisk.

“We’re really excited about the rates that are currently being offered to investors, they are increasing the value we provide and widening the gap between what we offer and what investors can access elsewhere,” Lupori adds.

What’s driving those big numbers? They are partly a reflection of the platform’s growing scale and capability, according to Lupori.

“We’ve been continuing to improve our credit capabilities,” he explains. “As we have grown our portfolio and invested in better technology for underwriting as well as expanding the team, we have become more knowledgeable about how to lend prudently.”

The platform has lent a total of just over £2.8bn in the eight years it has been active.

Read more: RateSetter set to break even in first half of 2019

But growth has also been boosted by the fact that RateSetter’s Innovative Finance ISA (IFISA) is really starting to have an impact. Launched in February and initially restricted to existing customers, the platform’s IFISA is now open to all. “It is generating real inflows, and doing so in two ways,” he says.

“Firstly, about one third of new customers now open an IFISA – and only an ISA, which suggests that they are people who might not have come to us otherwise.

“Secondly, we are seeing existing customers transferring their ISAs from elsewhere.”

A significant proportion of transfers come not from stocks and shares ISAs but from cash, he adds, also suggesting that investors who have had a good experience are now prepared to commit more resources to the platform.

For Lupori, who worked at credit card specialists New Day and Barclaycard before joining RateSetter as marketing director in 2015, seeing the IFISA take off has been particularly satisfying. The creation of the tax-free wrapper was a big part of his inspiration to switch from an ‘amateur’ investor to a P2P industry professional.

“I’ve had an interest in P2P for years – I first started investing as a customer in 2007 or 2008,” he reveals.

“But when [then-Chancellor] George Osborne announced in 2015 that there was going to be an IFISA, that completely captured my imagination. I believed it would really enable P2P to become more mainstream and I wanted to be part of that – bringing this new asset class to the ordinary investor.”

So when the call came a few months after Osborne’s announcement, he was ready to make the move: “I felt that RateSetter had the right product, and a very strong track record.”

The power of the ISA is not solely down to its tax-free appeal, he says. It’s also about familiarity and positioning.

“P2P gained a word that was already in the consumer lexicon, a recognised product that is on a shelf with other financial services products,” he comments. “The IFISA allows P2P to be on the same shelf alongside those other products.”

And since he joined, he says, he has also learned to appreciate the way in which the platform remains true to its democratising roots whilst still managing impressive growth.

“RateSetter’s purpose is to bring P2P to the people so it has a single-minded focus on the retail investor,” he says. “Whereas you see Funding Circle and Zopa taking slightly different approaches – institutional investment or going down the bank route.”

In a world where institutional funding is increasingly being sought by platforms large and small, and where products are increasingly simplified and streamlined to minimise the effort required to understand them, RateSetter can look a little out of place as a result of sticking so firmly to its knitting.

But Lupori argues that it is not different simply for the sake of being different. The things that make it unusual – the retail focus, the rate-setting business model, and of course the provision fund – also make it better. “It has a very strong proposition, and that proposition is based mainly on two things – rate setting and the provision fund,” he explains.

So unlike most rivals whose returns are determined by internal mechanisms such as pricing committees, the rates offered on RateSetter’s three markets – rolling, one year and five year – are determined by ongoing supply and demand. What’s more, investors are free to set the rate at which they are happy to lend – “it’s like setting a floor below which they are not prepared to invest” – he says.

It’s perhaps the purest, if not the simplest, P2P business model, says Lupori, because of the way it tackles the intrinsic challenge of matching the supply of capital to the demand for loans. “It’s more efficient for our rates to be driven by the market,” he asserts. “If we were to set the rates ourselves, we would have to second guess the point at which investors would be willing to invest.”

In combination with the provision fund – a cash buffer paid for by fees levied on borrowers which adds a cushion against bad debts – the model not only provides enhanced protection for lenders but also greater liquidity, explains Lupori.

“Because the provision fund diversifies your investment by default, we can match one borrower with one lender, whereas other platforms spread each investment over several borrowers,” he says.

So money put into RateSetter goes to work more quickly at the start, and – under normal circumstances at least – can be taken out more quickly should the need arise. That’s because fewer new investors are needed to replace each one who withdraws their cash.

But while the model appeals strongly to experienced customers, he does acknowledge that a simpler set-up might attract more novice investors. “We recognise that we are selling something that is new to most people, so it’s incumbent upon us to make our offering as simple as possible,” he adds.

Balancing the needs of existing customers with the imperative to bring new ones on board can be tricky – as evidenced by the platform’s attempts to simplify its popular rolling market product earlier this year.

The vast majority of customers on the rolling market take the floating Lend It Now rate rather than setting their own, but when RateSetter announced an end to rate setting, it was forced into a speedy about-turn after feedback from a small but vocal group of users.

Lessons have been learned, he says, and along with the provision fund, rate setting is here to stay. But that doesn’t mean that efforts to make the three markets work in a more uniform fashion will cease.

“You have to innovate in order to appeal to a broader base – initial early adopters are unlikely to be the customers who carry a product to eventual success,” he states.

“We are trying to find the optimal balance between keeping our most engaged and loyal customers happy whilst trying to find something that will appeal to a broader population.”

Read more: RateSetter names fourth non-executive director

It also has big plans to unlock the financial adviser and wealth manager market, a major opportunity that has been largely denied to P2P platforms so far. Cynics says that is because there is little in the way of fees to be earned by advisers, but concerns have also been expressed over the stability and durability of the P2P sector itself.

“We think it has taken time for intermediaries to get used to the idea that P2P is here to stay. But we think the time is now,” says Lupori, adding that RateSetter has been approached by several such intermediaries as well as making its own overtures.

He thinks that the intermediaries’ interest is partly being driven by their own customers asking about P2P, and partly because the longer the bull market in equities continues, the more urgent it becomes to search for ways to diversify ahead of its inevitable end.

“We believe RateSetter is a terrific option to have as part of a diversified portfolio, and that intermediaries should offer it to their customers,” says Lupori. Recent investors in the FTSE 100 could have lost nearly eight per cent of their capital in the past few months, he points out, “and we are not even in a downturn.”

But how would RateSetter stand up if – or rather when – a downturn does come along? “We are quite bullish about our prospects in a downturn,” says Lupori. Whilst not exactly welcoming the idea of hard times, it’s a rite of passage that he believes the platform – indeed the sector as a whole – is ready for.

“A bad year in equities is likely to result in people losing capital value from their investments,” he says. “The prospect of losing capital in RateSetter is low.”

With the provision fund at its current level, investors’ returns are covered to the tune of 126 per cent of expected losses, whilst those losses would have to be 244 per cent worse than expected before their capital is put at risk.

“We think a downturn could result in people investing more in RateSetter, not less,” Lupori comments.

So whatever happens, there should be plenty to keep him and his colleagues busy for the foreseeable future. He’s certainly clear about his own goals as he prepares for the chief investments officer job.

“RateSetter was created to provide access to this asset class for ordinary investors and it’s important that there is someone whose role is solely to focus on that,” he says. “I want to see it become a household name for investors.”

This story featured in the November issue of Peer2Peer Finance News, now available to read online