Rhydian Lewis heads up one of the biggest and best-known peer-to-peer lenders in the country. The RateSetter chief executive talks to Peer2Peer Finance News about the firm’s “relentless focus” on the retail investor, regulation and what he learnt from the wholesale lending episode
The business has never been healthier than it is today, which is great,” asserts Rhydian Lewis, chief executive and co-founder of RateSetter, now with the additional accolade of an OBE.
“It’s older, it’s wiser, it’s bigger, it’s got better infrastructure, it’s got better people, it’s regulated.”
Indeed, 2017 has been a pivotal year for the ‘big three’ peer-to-peer lender. In May, it announced a fresh £13m equity funding round from City investors and in July, it hit the £2bn cumulative lending milestone.
In September, it was recognised among the country’s fastest-growing technology firms in the Sunday Times’ Tech Track 100 and in October, it finally gained full Financial Conduct Authority (FCA) approval after a lengthy application process.
Of course, it hasn’t all been smooth sailing for the company, now in its seventh year of operation. It hit the headlines over the summer for “interventions” it made with its former wholesale lending partners (more on which later).
“The best sign of a business is how it copes with complexities and challenges,” Lewis continues. “That is what gives people confidence in the long-term sustainability of a business – how it reacts to things outside of its normal course of events.
“We’re very proud of being a customer-focused business and we hope that will continue to shine through.”
This customer focus is pivotal to Lewis’ approach to running the company.
“We have 250,000 active customers, which makes us the largest peer-to-peer lender by some distance, in terms of people we are touching today,” says Lewis.
“We are motivated by the impact we have on customers. That matters to us, so we’re very happy about that.”
Unlike some other P2P players, RateSetter has minimal institutional money funding loans through its platform, which Lewis attributes to their “relentless focus on the retail investor”.
According to data from P2P analysis firm Orca, institutions lent £38.25m through RateSetter in 2016, compared to £626.41m from retail investors. This year, institutional funding has shrunk to just £12.79m, with the platform on its way to becoming 100 per cent retail funded.
Lewis emphasises this is through choice rather than necessity.
“We’ve had institutional investors [in the past] and we’ve absolutely considered it,” he says.
“We want to make our product the best we can for the retail investor. Having a mixture of funding sources just means you end up having your attention diverted.
“Also, we think the most exciting thing about P2P lending is that it’s opened up access to lending to people that previously couldn’t do it. That’s the big breakthrough that regulation and the government has enabled, which is terrific.”
With such a strong focus on the retail investor, it is no surprise that Lewis expects the Innovative Finance ISA (IFISA) to have an “extremely positive” impact on the company. Now that RateSetter is fully authorised by the City regulator, it is able to apply to HMRC for ISA manager status and plans to launch its IFISA during this tax year.
“It will allow our existing customers to earn more and it will widen the audience, which can only be a good thing,” says Lewis. “I think it’s right that P2P is able to offer ISAs now. The industry has the infrastructure and the capability to handle it.”
Some P2P platforms have staggered the roll-out of their tax wrappers in a bid to avoid lengthy waiting times for investors’ funds to be matched. Earlier this year, Lending Works had to shut its IFISA to new money after receiving £1.5m in just 24 hours and Zopa is yet to open its IFISA to new investors.
But Lewis is confident that this won’t be an issue for RateSetter. “With the investment we’ve made in the last couple of years, our originations on the borrower side could step up pretty quickly,” he asserts. “Ahead of time, we’ve built quite a good origination capability and underwriting capability, so that will work well with ISA money coming in.”
It’s full steam ahead for RateSetter, but the firm appeared to lose a little momentum over the summer when it emerged that it had purchased a struggling company that was indebted to one of its former wholesale lending partners. The platform also bought up two of its former wholesale partners and a stake in another, which was subsequently acquired by Non-Standard Finance.
Was Lewis surprised by the amount of attention the issue attracted?
“The point is that we’ve moved through it, we’ve explained what we were doing,” he ripostes. “I think it’s a sign of the resilience of our platform that we’re able to explore different types of lending, which makes us a more informed and sophisticated business.
“The reaction from customers was not, in the end, a problem, so we’re going again. RateSetter has not gone backwards as a result.”
RateSetter’s tardiness in disclosing the situation resulted in its departure from the Peer-to-Peer Finance Association (P2PFA) for breaching the trade body’s rules on transparency, although Lewis states that leaving the organisation has not had an impact on the business.
“We were one of the founding members of the P2PFA, so the idea of trade associations is something we are supportive of, if they maintain a focus we agree with,” he adds. “It depends on the direction of a trade association as to whether we’d like to be a member or not.”
The FCA cracked down on wholesale lending – whereby P2P platforms lend to other lenders – earlier this year, saying it flouts the rules if the borrower (i.e. the other lender) does not have the required deposits permission.
It should be noted that RateSetter begun winding down its wholesale lending business prior to the FCA confirming its view on the matter.
Lewis takes the opportunity to clarify some elements of the episode which he says “have got lost in translation”.
“This was a technical issue, not a credit issue,” he explains. “The lending to those lending businesses has been successful and performed as we expected, as evidenced by the fact these businesses have gone on to be acquired by banks and listed companies.
“RateSetter decided that it was a grey area and – because of our confidence in our ability to originate our own loans – we decided that we’d stop doing it.”
The reason it resulted in “interventions”, Lewis says, is that the FCA’s ruling came as a surprise to its wholesale lending partners, which meant the firms struggled with the substantial challenge of overhauling their business models.
“So when you start unpicking it, this was not a credit issue, this was a technical issue and it’s now behind us,” he reiterates. “Personally, I think that RateSetter has learnt a lot from it in terms of its penetration of the lending market, because it’s dealt with companies that themselves are in the lending market.”
Interestingly, Lewis says that the issue has given him greater experience in the very sector that RateSetter is looking to disrupt.
“If you consider the complexity of banking, it’s a good thing if P2P lending businesses are able to understand the complexity that they’re competing against,” he says.
“Wholesale lending is a very big part of banking and in order to understand that market very well, it’s advantageous to increase our knowledge within this business.”
With Lewis emphatic that the wholesale lending episode is in RateSetter’s past, what about RateSetter’s future?
It’s a case of deepening their lending in their existing markets, says the chief executive, confirming that further international expansion is “categorically not” on the agenda.
“The plan is to focus on the UK, get to scale and focus on delivering a terrific product to UK lenders and borrowers,” he explains. “That’s the focus.”
In terms of RateSetter’s proportional mix of business, property and consumer lending, and now motor finance, Lewis says “it goes in waves”, with some segments more attractive than others at different times.
“It moves at different speeds, but the objective is to try and get a balanced portfolio across all of those lending markets,” he explains.
The Bank of England and the FCA have highlighted concerns about ballooning levels of consumer credit, but Lewis is unfazed.
“We don’t anticipate a major shock, which normally results from a spike in unemployment,” he says. “That’s what we believe causes major credit issues and we do not anticipate that.”
Lewis recently revealed that RateSetter will return to profit in the next financial year, after three years in the red from investing heavily in growing the business.
Is there perhaps too much pressure on companies to become profitable while simultaneously looking to scale up?
Lewis directs the attention to a Venn diagram on a whiteboard in his office.
“Funnily enough, this thing here is a constant reminder in my room of the many pressures on a business,” he says. “The four elements are customers, employees, shareholders and safety. If you scrimp on any of them, you might temporarily be able to give more to the other three parts, but it will come back and need to be fed in due course.
“There’s no point having a business that gives a terrific product to consumers but is not sustainable itself. There’s no point having a business that gives a terrific deal to consumers, but doesn’t have any employees because no one wants to work there.
“There’s no point having a business that gives a great deal to consumers but is cutting corners and therefore is not sustainable, which is what we mean by safety.
“We’re always trying to work out what needs attention so that hopefully we are building a long-term sustainable business and that’s what the area in the middle of the diagram represents.”
Of course, profitability will always be a pressure on businesses, Lewis adds. “RateSetter’s shareholders recognise that P2P lending has a big future,” he says.
“They recognise that requires investment and that time is a very, very valuable thing because you’re building a track record. They’re not impatient.”
Lewis is staying at the helm of RateSetter for the foreseeable future, as it enters its next stage of growth.
“I don’t have any plans to move into a non-executive role at RateSetter,” he affirms. “While I add the value, I will be fully executive and then, when the time comes, I will move fully on.
“I think execs becoming non-execs is sometimes confusing for people.
“Of course, under regulation and corporate governance, people moving from chief executive to chairman is not considered right and proper. I think it’s the same going from exec to non-exec.”
Looking at the wider industry, Lewis is confident of P2P’s resilience in a recession, even if some firms fall by the wayside.
“I think we can say until we’re blue in the face that this is a sustainable industry, but the single thing people trust in life is proof and a track record, so time is our friend in that way,” he says.
One thing that Lewis would like to see change is mainstream media coverage of the sector.
“I’m frustrated that people aren’t giving this industry as much of a chance as they should do because it’s got a lot to offer,” he says.
“I do find it a little bit frustrating that after seven years, when you look at the track record of some of these businesses, that people are still questioning their ability.
“I think customers are missing out. It’s about financial inclusion and giving people the opportunity to earn more on their money.
“This is something we’re very passionate about, giving people that opportunity. Access is the key thing here and that goes to the heart of financial education and financial inclusion, so if it’s not explained well, people miss out. That’s something we work hard to change.”
With Lewis’ relentless focus, that change seems very likely indeed.
This article featured in the December edition of Peer2Peer Finance News.