Out of the flames of the global financial crisis of 2007/08 emerged a new model for raising and investing capital – a lending marketplace where borrowers and investors could connect directly via the Internet, cutting out the banks.
RateSetter have been at the vanguard of the peer-to-peer lending movement. Founders Rhydian Lewis and Peter Behrens previously worked in traditional financial services at Lazard and RBS but in 2009 they decided to leave the old world in order to found the new.
John Battersby, RateSetter’s Head of Communications and Policy, explains,“Our first loans were made in the autumn of 2010, from the sitting room of Rhydian’s flat. The first lenders were financially-savvy individuals, who saw the opportunity to be part of an innovative new investment, and the challenge was to sort the creditworthy loan applicants from the chancers.”
The rest is history. RateSetter has lent over £1.8 billion to date, with £664 million in loans during 2016. The below chart from Crowdsurfer Pro illustrates the rapid growth of the company’s lending activities:
Source: Crowdsurfer Pro
Rhydian and Peter didn’t have first-mover advantage – Zopa launched the marketplace lending model as early as 2004 – but the opportunity to disrupt the UK lending market was bigger than one company and from the outset, RateSetter has innovated around the core concept of disintermediated lending in order to stand out from the crowd.
Uniquely, the platform allows investors to set their own target rate of interest on investments – contingent on demand from borrowers. This degree of control is an attractive proposition for investors when compared to traditional deposit accounts offered by banks. And in 2014, RateSetter became the only British P2P lending platform to start trading in Australia, a move motivated more by the specific opportunity, rather than a grand plan for global domination.
We can see from the next chart that RateSetter’s average loan size remains relatively small, with 336,000 of a total of 373,000 campaigns totalling under £10,000. This is lending for the real economy, with individuals and small business the main beneficiaries.
Source: Crowdsurfer Pro
The potential for growth in the market is staggering. There's an estimated one million financially sophisticated investors in the UK for whom P2P lending is a relevant proposition. And yet, each of the three leading platforms service only fifty thousand each.
How did the company and the industry as a whole grow so fast? It’s clear the “us and them” mentality that characterises traditional financial services is missing from marketplace lending. More like, “together, we win”.
The regulatory environment (or lack thereof) was a key challenge in RateSetter’s early days. Consumer credit was regulated, but there was no framework covering the investor side of the marketplace. John observes, “Rhydian and Peter realised they would need to work hard to earn trust from borrowers and investors. So, from the very beginning, RateSetter actively sought regulation, lobbying the UK financial authorities for increased oversight.”
They did this by teaming up with their peers, Zopa and Funding Circle. By 2014, an interim regulatory framework for marketplace lending had been put in place. Leading companies in the P2P sector have a track record in working together to drive the industry forward.
RateSetter has a resilient business model designed to cope with the vagaries of the economic cycle. But is the wider market resilient enough to weather a downturn? A period of economic contraction could actually help marketplace lending, by stress testing the model and accelerating market penetration over the long term.
The P2P sector was born out of a crisis. This has bred resilience. RateSetter sees opportunity where traditional financial services firms see challenges. John says, “Brexit creates opportunities for agile companies to step up where others struggle to adapt. It’s business as usual for the UK P2P platforms, who already benefit from a bespoke, native regulatory regime.”
P2P platforms drive business by cultivating trust. They cultivate trust by demonstrating a solid track record. Performance must be quantified and RateSetter has adopted a market leading approach to sharing its loan book data. If P2P lending is to sustain its growth trajectory, platforms need to become even more transparent.
Here at Crowdsurfer we expect this opening up of information and data to be a key driver for the growth of marketplace lending and all forms of crowd finance. It’s one of the reasons why we’ve built a platform that’s the home of market leading data and insights on crowd finance. You can try it out for free here.