Mike Bristow, chief executive and co-founder of CrowdProperty, explains what true platform transparency looks like
PLATFORM TRANSPARENCY is a hot topic among investors and regulators at the moment. After a clutch of high-profile peer-to-peer platform collapses, due diligence has become an increasing priority for P2P lenders – but according to Mike Bristow, chief executive and co-founder of property P2P platform CrowdProperty, true transparency involves more than simply looking at a platform’s target returns and default rates.
“You need to look at the lending record to date and the platform’s track record,” he says. “Now, there are a number of elements to that. There’s amount of money lent, which is not the best measure. For me, it’s more important to look at the amount of money that has been returned to the platform, because a platform is only a lender when the capital and interest successfully comes back in, otherwise it’s a charity without a cause.
“It is also important to look at the amount of time the platform has been operating. While historical performance is not an indicator of future results, it is a reflection of experience and system efficacy.
“And finally, I firmly believe in independent third-party verification and that’s why we became Brismo Verified. Brismo has looked at every single loan cashflow, thereby validating our performance and putting it into a standard, pan-industry comparable methodology. This gives lenders critical comfort that an independent, sector-expert third party has trawled through our books.”
Other independent analysts include 4th Way who also thoroughly analyse platform operations and – crucially – asset class expertise amongst the people.
Lending record, expertise in the asset class, operational best practice and independent third-party verification are the pillars of P2P due diligence, but Bristow says it doesn’t stop there.
“There’s another element of transparency which is much more forward-looking and business model related and that is being transparent about borrower rates and what the lender gets,” he adds.
Transparency around borrower versus lender rates is not often seen in the world of P2P, and Bristow believes that this is due to the “big, big difference” between the two figures.
“In some cases, a lender might be getting eight per cent in returns, but capital is lent to a borrower who is paying 15 per cent,” he says. “There is a hugely different risk profile on the capital that the lender is providing and it’s their capital that is at risk. I find it shocking that the sector is not more transparent about this.”
Ideally, the difference between the borrower rate and the lender rate should be minimal – platforms need to cover costs and earn something for their relatively efficient services, but they should never be earning anything close to what their lenders are earning. If a borrower is being charged 15 per cent, while a lender receives eight per cent, the lender is investing in a much riskier loan than the target returns suggest. Borrower rates are typically set in a market – if a borrower is paying 15 per cent on a loan, it’s likely they have not been able to find cheaper capital, probably for good reason.
According to its most recently updated statistics through five years of operating, the average CrowdProperty contracted borrower interest rate has been 10.01 per cent, while the average return to lenders has been 8.05 per cent – less than a two per cent spread.
The platform has originated £43.5m in loans and returned £14m of capital to investors, plus £1.3m in interest with a 100 per cent capital and interest payback track record.
“If you can’t find this level of transparency, ask yourself why,” says Bristow. And as the appetite for due diligence increases, many more lenders should be asking this very question.