RATESETTER recently announced that it will be revamping its product range to reduce liquidity risk for investors. Mario Lupori, chief investments officer at RateSetter, talks to Peer2Peer Finance News about the upcoming changes.
RateSetter announced last week that it would be rejigging its investment products, to boost liquidity and give the ‘big three’ peer-to-peer lender more control over market rates. What motivated RateSetter to make these changes, which come into effect on 3 October?
“Liquidity is often not thought about – it’s not important, until it is important,” Lupori (pictured) tells Peer2Peer Finance News. “So what we want to do is continue to strengthen the foundation of our product, so capital risk and liquidity risk will both be reduced further.”
RateSetter investments are currently spread across three markets – rolling, one and five year – which means supply and demand is set at a market level. Under the revamped product range, liquidity will now be based on RateSetter’s entire loan portfolio, rather than the liquidity of one particular market.
The main change will be bringing all investments together into one big pool so that any RateSetter investment has the benefit of the liquidity of the whole portfolio. RateSetter’s portfolio is now worth £900m in total.
“RateSetter’s product has been successful so far because of how it acts like a collective investment because of the provision fund,” Lupori explains.
“This means an individual’s investment is not determined by the loans it is matched to but rather the risk is mutualised across the whole portfolio because of the provision fund. Not only has the provision fund protected the capital, but it has protected every penny of interest.”
RateSetter is offering three new products: Access, Plus and Max. Access will offer three per cent interest and no fees to access money; Plus will offer four per cent interest and cost 30 days’ interest to access money; and Max will offer a five per cent interest rate, with a fee of 90 days’ interest to access money.
Under the old system, that liquidity would be split across three markets – for example repayments on a one year loan go back into the one year market. With the new products, they all draw from the same market and the same pot of money.
“So when an investor wants their money out you can’t simply ask the borrowers to provide it then and there,” Lupori says.
“But borrowers are repaying all the time, about £60m per month. On top of that we have new money coming in from new and existing customers so in total there’s about £90m available to facilitate withdrawals and to make new loans every month.”
The impetus for the changes wasn’t due to customer feedback, Lupori says, but a drive for RateSetter to strengthen itself over the long-term and to create a more sustainable product for the future.
“The change isn’t borne from a current need – our position is already unrivalled in terms of risk (nobody has lost a penny) and liquidity (early withdrawals take one day on average) – but is about recognising long-term potential and addressing long-term risks long before they occur,” Lupori states.
The benefit of RateSetter setting the rate of return rather than letting the market set it is twofold, he continues. It allows the platform to have greater control of its costs – creating a stronger business and a lower risk platform for customers to use – as well as providing customers with a more predictable rate of return.
The need for a predictable return is particularly important as P2P is becoming a third asset class, between cash and shares, according to Lupori.
“Where RateSetter seems to resonate most with customers is as an alternative to cash,” he reveals. “If you look at the transfers into RateSetter, more than four out of five are coming directly from cash. Stable rates are what these people expect. They expect an interest rate, and that’s the rate they get.
“Additionally, the rate can respond to external factors such as changes in interest rates in the economy – we want to ensure that we’re providing a product that is competitive to savings.”