Peer-to-peer lending platform RateSetter made a pre-tax loss of £4.9 million ($6.4 million) in the year to the end of March, falling into the red after making a £476,000 profit in 2015.
RateSetter blamed the loss on a switch in strategy — from charging fees up front, to charging fees throughout the duration of its loan. This means it makes less money up front but gets a steady stream of income over the lifetime of the loan. This is preferable for businesses as they like to plan ahead and it gives management more certainty over cash flow.
63% of all RateSetter loans now have the platform’s fee repaid as part of the monthly borrower repayments, a spokesperson confirmed over email, compared to almost none three years ago.
The company says in an emailed statement that the change was encouraged by City of London investors Woodford Investment Management and Artemis, which took part in a £20 million funding round for the platform last year.
RateSetter CEO and cofounder Rhydian Lewis says in an emailed statement: “The switch from up front to recurring fees was not a decision we took lightly. However, it greatly enhances the sustainability of our business — we strongly feel that it will prove to be a very positive development and anticipate that others in our industry will follow our lead.”
RateSetter is a peer-to-peer lending platform that lets people lend money to consumers. It is the second biggest peer-to-peer consumer lender in the UK, according to industry tracker AltFi, which calculates that RateSetter has lent £456 million over its platform to date.
Bad debt rates have risen since RateSetter first opened its doors in 2011 but the company says the change to the fee model should stop this trend as it “aligns RateSetter’s interests with those of its investors as it provides a financial incentive to only approve loans which perform.”
Former banking regulator Adair Turner claimed earlier this year that: “The losses which will emerge from peer-to-peer lending over the next five to 10 years will make the bankers look like lending geniuses.”
Turner and other industry watchers worry that many peer-to-peer platforms’ revenues models, whereby they make a one-off fee each time a loan is made, means they will keep churning out loans even if credit conditions worsen.
Lewis says in the statement: “Being an early stage lending business is tough and you are prey to negative selection. However, we are now beginning to see P2P work and attract more investors and better borrowers.”
Rival platform Funding Circle announced recently it had curtailed lending in the US at the start of the year after seeing loans were underperforming. Chief risk officer Jerome Le Luel said part of the problem was “we found that the model was not fully adapted to the US economy at that time.”
RateSetter’s 2015 accounts also show revenue rose from £12.6 million in the year to 31 March 2015 to £18.5 million in the year to the end of March 2016. Loans under management rose by 70%, from £341 million to £581 million and the number of active investors grew from 18,608 to 31,036 over the same period.
Lewis says in the emailed statement: “Having turned a small profit in 2013-14 and 2014-15, proving our model, we’ve deliberately planned and delivered an increased level of investment into our business. That investment is already starting to pay off.”
RateSetter says it currently has £640 million of loans under management and 36,310 investors on its platform.
As Business Insider pointed out earlier this year, Britain’s two biggest peer-to-peer lenders have lost a collective £50 million in the process of running their platforms over the last decade.
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