THE MAJORITY of lenders considering peer-to-peer would want the reassurance of a provision fund, according to P2P credit risk expert Kevin Allen (pictured).
The industry veteran, who was RateSetter’s first-ever chief risk officer, said that less engaged investors would be better off choosing a platform with a provision fund and lower returns.
“I think the majority of lenders – the less engaged lender, like my mum and dad – don’t want to be choosing their loans, they don’t want to be choosing their platforms,” said Allen, who is now chief risk officer of P2P payday lender The Money Platform.
“If having a provision fund means that sort of reassurance but they’re only going to get five per cent returns, they’re happy with that. They don’t want to get seven per cent and have to get emails about bad debt.
“That reassurance comes at a cost and that cost is maybe one per cent or two per cent. But I think there’s a vast majority of normal lenders in the UK who would prefer it that way.”
However, Allen said that more confident investors seeking higher returns should choose P2P investments that are not covered by a provision fund.
“If you’re an engaged, risk-taking, early-adopter P2P lender, you probably shouldn’t lend with a provision fund, because ultimately it does mean your returns will be lower,” he said. “You should be willing to lend without a provision fund, to maximise your returns.”
Allen said that during his time at RateSetter, where he went on to become head of retail lending, he got called an “enthusiastic provisioner” because of his desire to boost the amount of money put into the fund.
He cited a recent report by P2P investment firm Bondmason, that criticised the use of provision funds as they eat into returns.
Despite his predilection for provision funds, Allen agreed that the report showed “good logic”.
“It’s just a marketing tool really, to give the impression that you’re really safe – ‘we’re the biggest, put your money there’ – and it’s true,” he said.