FUNDING Circle’s decision to get rid of its popular manual bidding function has re-opened the debate into autobid vs manual marketplace lending. Despite promising higher overall returns, some investors have complained that autobidding removes some of their choice, making it harder to actively manage their P2P portfolios.
However, while the introduction of autobidding represents a change for Funding Circle’s long-time users, it can hardly be described as a surprise.
As one of the ‘big three’ P2P platforms operating in the UK, scale was always going to be a challenge for the platform. Any growth plans have to be in line with the platform’s own stringent risk profile, so that they can cater to the broad range of clients who are invested in the site. While manual bids are great for experienced investors who are used to managing their own diversified portfolios; it is not necessarily the best option for P2P newcomers, or smaller lenders.
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“Autobid is easier for the platforms to manage the flow of money, balancing borrowers with investors,” said Neil Faulkner, chief executive and founder of P2P analysis firm 4th Way. “Platforms also worry that investors are not diversifying enough.
“For investors, automatically lending increases the number of loans that you lend in. Lending across more loans dramatically lowers the risk of losses.”
Manual bidding is time-consuming and requires a level of market insight that the average investor does not always have. It requires lenders to check and double-check the variety of loans that are on offer, before choosing the ones that meet their specific investment needs. For the pros, it’s a chance get in early on the better investment opportunities. And for less sophisticated (or less observant) lenders, it is easy to miss out on the best deals.
“There are a lot of investors who don’t seem to realise that for many types of lending, including small business lending like Funding Circle, you need to be spreading your money across 100 or more loans,” said Faulkner. “I have seen cases where experienced investors or professionals who are used to having just 10-20 shares in the stock-market portfolio believe they can also create a safe portfolio of small business loans with the same number.
“Autobid is likely to save a lot of investors from disappointing results.”
Following the news that Funding Circle was removing the manual bidding function, some retail investors used the P2P Independent Forum to air their concerns that the platform was discriminating against the mature investors who have been with the site from the start, and have spent a lot of time learning how to use the manual bidding system to achieve the best possible returns.
Some even suggested that autobidding would make the platform akin to an investment fund, where money is pooled and invested in a portfolio that has been set by the investment manager. However, 4th Way’s Faulkner was quick to correct this idea.
“The main difference between P2P autobids and investment funds is that P2P autobidders are not usually investing across the whole outstanding portfolio and they are not doing it in proportion to their total investment,” explained Faulkner. “P2P autobidders hold a part of the outstanding loan book and the proportions they hold in each loan varies. In addition, when investment positions close, investors can keep their money in cash or choose to re-invest.”
From 18 September, the manual option will no longer be available to Funding Circle users. Instead, lenders will be invited to join one of two new autobid accounts, which come with two different levels of risk.
Of course, Funding Circle is by no means the first platform to come to the conclusion that autobidding is good for business. Both Zopa and RateSetter offer automatic allocations as a way to spread risk and diversify user portfolios. And Funding Circle has been openly promoting its autobid tool for several years, without making it mandatory – it says 73 per cent of new investors choose the autobid function.
By removing the manual option, Funding Circle’s co-founder James Meekings claimed that the firm was making the platform “fairer” to all.
“These changes will make lending at Funding Circle simpler, better, fairer” he said. “We want to create a level playing field for all investors and ensure everyone has the same opportunity to lend to UK businesses.
A level playing field where all investors are operating with the same information and the same opportunities. Isn’t that what P2P is ultimately about?