ArchOver Overreaches And Its Bad Debts Are Rising
Recently, one borrower at ArchOver* suffered severe trouble.
This borrower is so large that I shall argue it represents something like 8% of ArchOver's entire historical (corrected) loan book. That is too much.
What happened with this borrower?
Every borrower and every bad debt has its own story – and it is all too easy for lenders to read too much into the details of a single, sorry, individual borrower.
So I'll just stick to points here that are relevant to the bigger picture at Archover for lenders.
Amendment on 31st October: ArchOver itself never actually classed this borrower's loans as a bad debt as it has managed to meet payments still…
The borrower blew all out of proportion
The main point about this problem borrower is that lending to it through the ArchOver website grew all out of proportion. And the blame lies entirely at ArchOver's feet.
In notes of a conversation between ArchOver CEO Angus Dent and a 4thWay colleague, the story shows that the borrower initially received a few loans worth around £600,000 and the plan was to lend around three or four times that much.
The borrower later suffered when a large customer refused to pay millions of pounds still due to it. And then the borrower lost an expensive legal battle in arbitration.
As the borrower's situation deteriorated, instead of calling an early stop to the lending and drawing a line under it, ArchOver committed lenders' money further to the same borrower. This can be fine up to a point, but now ArchOver lenders are lending £4.2 million to this borrower.
In contrast, ArchOver states that total lending is over £82 million. But I think that figure can be said to involve a lot of unintended double counting due to the way lending through ArchOver works. Like FundingSecure and several other P2P lending sites, it often makes more sense to treat some repeated lending to the same borrowers as the same loan that has just been extended.
By this token, I estimate that real lending has been something closer to £50 million.
£4.2 million of outstanding debt to this one borrower means that around 8% of the money being lent through ArchOver has gone to just the one borrower. This is a huge amount.
I think there is no type of lending that is so safe that such a vast proportion of the total lent should be given to the same borrower.
Extreme steps taken by ArchOver show positives and negatives
The story continues: ArchOver was forced to declare the borrower bankrupt and it was able to wipe clean over £3 million of the borrower's growing debts to the taxman and suppliers. In the process, like a phoenix, Archover took over the business along with all its staff, and so it is now the owner.
ArchOver, or AchOver's own owner, the Hampden Group, has paid out £200,000 to do all this, with a further £50,000 or £60,000 in costs possibly to come.
ArchOver says it believes, with the borrower's slate wiped clean of over £3 million in other debts, the borrower is now placed to make a profit in the next 12 months.
However, Dent acknowledges that if the borrower loses a high value customer it could destroy that scenario and that the industry has had a “torrid time”, suffering for years from a combination of competing technology, low prices, international sanctions and tariffs.
Dent said “if we get out and make a profit” then that profit will be shared with the people who were lending to the borrower. It is no longer a simple peer-to-peer loan to a solid business.
Loan payments to the lender are said to be on time and up-to-date. If you're a cynic like me you're wondering the same thing I did – and we asked ArchOver about that for you: yes, the monthly loan payments are being paid for from the borrower's sales, not from a pyramid scheme of new loans!
It is fantastic to see that ArchOver and its successful owner had the will and capacity to protect lenders at great expense and effort, but on the downside no borrower should ever be allowed to get so big that it is not allowed to fail. You've all heard something like that before!
Who is re-lending to the same borrower?
Even after all the above has occurred, the borrower has been allowed to renew existing loans through the ArchOver website.
That is quite possibly okay, but I do wonder whether the interest rates offered to lenders are acceptable: they top out barely in double digits. That doesn't seem like much compensation for lenders from a recently bankrupted business that has annoyed its suppliers in a tough industry, even if it has had a lot of tax debt written off.
Perhaps with that thought I have just uncovered a downside to the new auto-lending programme at ArchOver: could it be that up to 10% of your money is being lent to a borrower that has recently been bankrupted? I am not allowed to name the borrower in an article, so you might want to look into it.
What has ArchOver learned?
ArchOver's CEO has been extremely candid in explaining the whole story, but is that enough?
When RateSetter* made a similar mistake in lending too much to one or two borrowers, it took pains to directly accept responsibility, apologise publicly, and to explain to us and to its lenders what it had learned and the steps it would take to ensure it would never happen again.
It capped the maximum loan amount for the type of loan that went wrong, it improved loan monitoring and stopped approving certain kinds of loans.
A response along those lines is what I would hope to see from any P2P lending site. However, we have no information that ArchOver is making any changes and have no word that it accepts it has lent too much to too few borrowers.
Total bad debt could be around 14%
I discovered something else.
As far as we know, there are three borrowers that have had bad loans out of nearly 70 borrowers. That is an acceptable level of problem borrowers.
However, using my rough estimate of the actual, adjusted size of the total loan book in terms of the pound amount, I'd say the total bad debt amounts to around 14% of money lent.
I would wish that the overall historical bad debt was under 10% at the very least.
The figures on ArchOver public website do not help lenders to understand this. I think more clarity is needed there.
Correction on 31st October: ArchOver has told me that the bankrupted borrower is not one of the three loans it classes as a bad debt, because the borrower has continued to meet monthly payments. The figures above are still correct based on the three declared bad debts. If you want to include the bankrupted borrower, the problem lending figure is more like 22% by my estimate.
Bottom line if you lend through Archover
One of our experts recently stated that to use ArchOver wisely, profitably and with much lower risk – since it has a good number of excellent loans – lenders should consider three simple controls:
- Don't lend too much to one borrower – no more than 1% to 2% of your entire investing pot.
- Lend in secured and insured or secured and assigned loans only. The insurance is still not proven, but all borrowers known to have suffered problems have had at least one bespoke loan, which are probably offered to weaker borrowers on average, and the new research and are not yet properly tested.
- Lend in just the first loans to borrowers only – don't lend to repeat borrowers to reduce the risks.
Of course, as usual, you should also spread your money across a lot of P2P lending sites too.
On the basis of the recent interview with Angus Dent and on my research into bad debts, a 4thWay expert will take a look at it and shortly update the 4thWay ArchOver Review.
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