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How To Assess The People Behind P2P Personal Or Business Lending Platforms
One of the key things to understand when putting your money into a lending account is the competence and character of the people behind the P2P lending company in question.
While I can't distill all 4thWay's acquired knowledge and method for scrutinising key people, I'm going to pack in tips on what to look for and how to get it.
The type of P2P lending company
The qualities you're looking for in key people always depend on the types of lending involved. Today, my focus is on three types that typically involve the same sorts of people.
The first two types are easy to explain. They are P2P lending companies that do small unsecured personal loans or small business loans, which are often based on an automated approval process.
The third type is P2P companies that do slightly larger business loans (perhaps up to £50,000) that are loosely secured. For example, if a platform takes personal guarantees and calls it security, that is extremely loose. An insecure kind of security, if you will.
Another example is when the security is not solid but precarious, such as cash and assets that the business might well burn through or use up before going bust. This is typically the case when you see “fixed and floating charges” instead of specified property that has been independently valued and which the borrower is not allowed to sell.
Don't they always know what they're doing?
The key person at one P2P lending and IFISA provider once told one of 4thWay's specialists – while literally laughing out loud – that he developed the model for approving the loans himself. His background was in marketing.
He even said:
“Apart from my own investments I have no finance background. We joked that we knew nothing about it.”
That particular P2P lending business closed not too long after it started. (Happily, it ended profitably for all its lenders, but that was in no small part because the main founder covered substantial costs himself for some loans that went wrong after rookie mistakes were made.)
You'll be glad to know that situation is far from typical. The vast majority of lender cash is invested where the people have a great deal of experience.
Yet they don't usually make it obvious when they lack relevant experience and training, which is why you have to dig.
What to look for
Head of risk
At a minimum, you really want to see that a P2P lending company's head of risk has prior experience in the same or similar role, which might also be “head of credit” or “chief risk officer”. One of those titles.
This is the one person you can't normally do without at even the smallest personal or small business lending provider.
It's highly preferable that their prior experience is in the same kinds of loans that the P2P lending company is approving and that this is clearly stated. If it isn't clearly stated, assume the experience isn't the same.
In smaller P2P lending companies, it's usually okay if the head of risk is an external consultant, because they simply might not have enough to do to be on staff permanently. You want to see that this person helped to set up the credit model, which outlines the process used to take a loan application through to rejection or through to setting interest rates and making a loan offer to the borrower.
Ideally, even with consultants, you still want to see that they continue to be properly involved in a regular way at the operational level, such as being the head of the credit committee that makes the final decision on lending.
It's better if you recognise the banks that they have worked for. You want to see that they express the scale of the lending that they have previously overseen to give you an idea of their experience. You're looking to see they have risk management and risk analytics experience. You want to see they are numbers people and might look for phrases like “quantitative modelling”.
If they have credit committee and strategy experience that's also good.
In terms of the amount of experience, a couple of years' experience in these things is generally a good start and might be enough for a small P2P site, but we only get really excited about someone with considerably more experience than that, and at the top level.
If this person has formal training involving finance, that's great, but simply having worked up the ranks of underwriter and risk analyst into management is also fine.
Larger P2P lending companies will have a team of underwriters and the team invariably has some prior experience. At small P2P lending companies, an experienced underwriter is nice to have, but it isn't as essential, since the head of risk should be able to train someone adequately. Often the head of risk trains the founder and one or two other existing employees.
Similarly, when a P2P lending company starts to reach a certain size, it might have one or more people in house who deal with “collections” – aka chasing bad debts and pursuing through the courts. This isn't completely essential, however, as this can also be outsourced and recouping a lot of bad debt is not usually such a central part of this kind of lending.
It isn't a deal breaker but, with small business loans, you ideally want to see someone who is a trained accountant that is directly involved in operations. This is more so the case for loosely secured business lending as it is for lending based on automated decisions.
Once a P2P lending company reaches a size where it is generating revenue in the millions, you really want to see non-executive directors holding the board to account. Non-execs should be on a formal nomination committee, audit committee and remuneration committee, and these committees should actually meet and officially log decisions. At this level, you'd hope for non-execs who themselves have held key operational roles in lending operations.
In our experience, smaller P2P lending companies with non-executive directors don't have these kinds of non-execs involved. Here, when we dig into what the non-execs actually do and what their backgrounds are, they usually offer the CEO occasional strategic input rather than helping to improve the lending operations. They are often angel investors and serial entrepreneurs who have put some cash into the business and then associated their name with it to give it a little more authority.
So non-executives only tend to become relevant as the P2P companies get a bit bigger.
An example key person
I'll take the bio of Funding Circle's Chief Risk Officer as an example:
“Jerome brings 20 years of experience in risk management. In his previous role at Barclays, he was in charge of stress testing, risk reporting and quantitative analytics for the entire bank. Previously, he was Global Chief Risk Officer for Barclaycard, the cards and payment business of Barclays, managing risk for a £40 billion lending portfolio across Europe, Africa and the US. Under his leadership at Barclaycard, the business doubled in size and tripled in profits despite the economic recession. Prior to that, Jerome spent 12 years with credit cards specialist Capital One, joining this innovative venture at start up stage and supporting risk management through successful growth.”
Why it can be okay if small P2P companies have fewer skills
You might wonder why you'd even consider smaller P2P lending companies, which aren't as well stocked up on all these skills and they might just have the head of risk. The reasons can be three-fold.
Firstly, since they are small they can be far more selective. Consider Zopa, which was approving so few loans originally that it was accepting just 0.5% of loan applications. Under those circumstances, even with less skill, it can be quite easy to select the very primest of the prime borrowers who apply. Today, Zopa accepts around 20% of applications, which is similar to major banks.
The second reason partly springs from the first. Due in part to extreme selectivity and in part because lenders are more wary of potential risks at newer platforms, the lending rates are higher. These smaller P2P companies can select the borrowers who are not just the very best, but they can select those borrowers who are the very best and who also don't shop around for better interest rates.
That's how smaller P2P companies can pay lenders higher rates and it's typically an especially lucrative time for lenders.
Finally, this is sometimes all supported by an overstocked reserve fund or other so-called “credit enhancements”. For example, the founder might put a massive pile of cash into its initial reserve fund to give new lenders a safety net and help them feel more confident about lending. At this stage, these funds can seriously diminish any risks due to any lack of experience.
Give them a call
Most individual lenders either can't or don't meet up with, or call, the key people at a P2P lending company to interview them. But that doesn't mean you can't seek to do so. Many P2P lending companies have people you can talk to and sometimes you can even directly reach one of the key people, such as the CEO or the head of risk. Don't be afraid to try, even if it's just a phone call.
At 4thWay we have honed our process for assessing the people behind a platform over eight years and we use some advanced investigative interviewing techniques taken from the UK Police force, the FBI, the latest research in psychology and communication, and even TV programmes such as Columbo and Yes, Minister. We'll steal ideas from anywhere if it means we are more likely to increase the flow of information, improve our understanding of the key people and get to the truth of the investment opportunity.
One technique alone improves the chances of accurately identifying lies by an additional 40% (assuming we have average individual skill at detecting lies), while simultaneously aiding us to keep the contact at arm's length.
Yet, for all the honing we have done to our method, it probably hasn't hugely changed our results. Eight years ago, we did a great job at identifying whether or not the key people really knew what they were talking about, when we measure our opinion against the actual results they went on to help lenders achieve over the following years.
In more recent years, while our process is smoother and more professional, we've still done a great job at that. So in that sense there's been no change.
This bodes well for you. (And less well for “experts” like ourselves, since we can't demonstrate a massive edge over laypeople willing to put in some effort!) It means that individual lenders are also able to get a sense of the people behind a P2P lending provider, especially if you're able to meet them or at least talk to them. You can't expect to be right all the time, but provided you're investing in a basket of lending accounts you're likely to be right most of the time, and that's good enough.
Like many things, practice makes perfect. Call up lots of them and ask them lots of questions about their business, how they go through their approval process, what their background is, who's on their team, whether they've had exactly the same role in other businesses. You will build up a sense for what they should sound like, what phrases they will use, if they really know what they're talking about. If you don't understand something, ask them to explain it.
Take a friendly attitude to them, even if you're cynical. You shouldn't try to make friends, but try to enjoy getting to know someone and build a rapport with them in order to encourage more conversation from their side. If you want to try to catch them with a difficult question, leave it to the end and make light of it, perhaps by pointing out that you've saved a tough question till last.
If you do decide to try to speak to a key person, I highly recommend you leave it to the very last thing you do in your assessment. This is so that charming people have less opportunity to influence your opinion of them before you've had a chance to look at colder, harder facts. And be ready to reject their offering even at this late stage – even if you've put a lot of time already into assessing their business.
Talking to them is an optional extra. At 4thWay, if we look back at our research, we see that by the time we talk to them, what we learn doesn't greatly change the overall assessment we had already maden. I mean, it always has an impact, but the scale of that impact doesn't usually result in a starkly different review.
Ultimately you'll usually be able to get more than a sufficient view of a provider to assess the risks and rewards without picking up the phone. Certainly, when spreading your money sensibly across six more P2P lending accounts (or IFISAs), the balance of risks will be well contained.
The two obvious starting points for individual lenders to begin research are LinkedIn and the P2P provider's own website. Glassdoor can also sometimes provide clues.
In our experience, public, bare-faced lies, such as saying that they worked for Lloyds Bank when they didn't or stating they were head of credit when they weren't, is a surprisingly rare event.
What isn't rare is to phrase thing so carefully that they aren't technically lying but leave the impression of certain experience that isn't correct. For example, “20 years in financial services” might actually have been sitting in a foreign exchange bureau at the airport. (Which was almost literally the case at one provider.)
You want them to specifically say: “I was head of underwriting”, “I was head of credit”, “I was on the underwriting team”, “I was on the credit committee”, “I was head of the credit committee”, “I did quantitative risk analysis”.
And you want them to say what kinds of loans they were doing that for: was it small business loans or personal loans or was it something completely different, like property development loans? That wouldn't mean their experience was irrelevant, but clearly it isn't as useful.
If the provider's own website and linkedin fail to furnish you with even a basic CV, I'll save you some time right now: just assume they don't have any experience and training, and move on. You will be right.
Once you've collated the information you can from those websites, look for any supporting evidence you can. Google them and look for their name mentioned in articles when they were head of risk for HSBC's personal loans division or whatever. You might not find anything, but it can help you assess the risks.
In our experience, we haven't yet found a correlation showing a connection between competence/skill and whether the person is specified in the P2P lending company's entry on the FCA register. However, being mentioned in the register can help to indicate whether a person is as directly and regularly involved as head of risk as it appears, or just a temporary external consultant who actually just came and went.
Don't let discrepancies slide. If someone is listed as head of risk on the P2P company's website, but the individual's linkedin profile says that they were merely a consultant for the P2P company a few years back, then assume that the more distant, less favourable connection is closer to the truth.
If someone is listed as a director on the website, but not listed as a director of the company in Companies House (search the Companies House register), that person is not a director and is probably not deeply involved or is even no longer involved.
Whenever there's information that jars or conflicts, assume worst case unless fresh evidence shows otherwise.
These discrepancies aren't always dealbreakers, because small businesses in all industries often use lies like these to make them seem bigger and more impressive than they really are. Or they are too busy to update their websites. This all happens at many P2P lending companies, even some of the ones that are very good at assessing and approving loans.
…Still, it doesn't beat down-to-Earthness when it comes to deciding whether and how much to lend through a given P2P lending platform.
We love this trait. When someone provides you with far more information and detail than you requested, combined with a forthright, down-to-Earth attitude, this is hard to fake.
You want them – and their team – to be going overboard to supply you with the information you request and more.
Again, some secrecy is not always a dealbreaker. Sometimes P2P lending companies are worried about competition from other platforms. For example, it can be difficult to establish the full average costs that borrowers pay, because some P2P lending companies are worried about competition under-cutting them. Or perhaps they don't want their borrowers to find out in advance in very clear language exactly how much their loan might cost them.
Sometimes, they are wary of your motives for asking – although I expect that is more the case with public analysts like 4thWay than individual lenders, so you should suffer that particular issue less than us.
Whatever the reason, secrecy is absolutely not good when investing in anything, so be cynical. The best P2P lending companies are invariably highly transparent.
It could pay to ask – politely – at least a few questions that you think might be a little uncomfortable to elicit a response. A defensive reaction can be a bad sign.
Look for traits that show what insurers call “moral hazard”, which means aspects of their character that increase your risks.
If senior people at a P2P lending company are constantly talking about their rapid growth and revenue, and about getting new investors on board, and not balancing that with even more talk about the skills of its people and its commitment and discipline in selecting high-quality loan applicants, this suggests priorities are not aligned enough with your own. They might be putting short-term profits ahead of sensible risk controls.
Don't confuse anecdotes with lots of experience
It's quite common for inexperienced people to talk about – or write about on website blogs – one big project or thing that's gone well. They use that as an example of their skill, but if they are not showing evidence for, or talking, about many, many similar examples, the experience is probably more limited than they want you to realise. Try to find the right probing questions, dig for the information, and ask for it.
Work on your antennae to spot evasive words. “Background in investing and finance” is not very descriptive of what someone has been doing in the past. Assume experience is not relevant as your starting point until it's clearly defined.
Establishing whether non-executives do a good job is very difficult or impossible, but you can at least see if the right committees have been set up and that they are on them. You might get this information from their company accounts at Companies House.
Often, non-executives appear to have a lot of relevant experience, but sadly it isn't always utilised by the business in a formal way – or even in any way. Ascertain how much they get involved in operations, such as whether the non-exec with the most relevant experience is actually on the credit committee or advises the committee on a regular basis.
If there's no clear evidence they are directly involved in aiding the lending, risk or underwriting operations, assume that their knowledge is going to waste.
Example of potentially useful non-execs
Again looking at Funding Circle for examples and pinching parts of their bios, here are three non-execs that are particularly interesting:
“Helen has over 25 years of experience in financial services, particularly in remuneration design, regulation and human resources. Helen was formerly a partner at Deloitte and, among her previous roles in her career, Helen was Global Head of Reward at Standard Bank, Head of McLagan Europe (part of Aon) and held roles in human resources in Fidelity International.
“Helen serves as Non-Executive Director of Ashmore Group PLC (where she is Chair of the remuneration committee), Governor of University of Bedfordshire, Governor of John Whitgift Foundation and independent member of the remuneration committee for The British Olympic Committee.
“Geeta serves as Non-Executive Director of Virgin Money UK PLC (where she is chair of the risk committee and on the audit committee), Wizink Bank SA (where she is chair of the risk committee and a member of the audit committee) and Ultra Electronic Holdings plc.
“Matthew has over 36 years of experience of financial services. Having qualified as a solicitor with Slaughter and May, Matthew held a number of risk management positions with HSBC…”
How much training and experience is sufficient?
When key people clearly have stacks of experience, fine. But when they don't, it can get tricky. It's where a judgement call is required. Just as experts aren't always very good despite their training and experience, those with surprisingly little training and experience can sometimes be good.
The one rule you can't forget is: if in doubt about the people, don't invest through the lending platform. There are plenty of other lending opportunities out there to choose from where the people have vast amounts of experience.
Suggested further reading:
Independent opinion: 4thWay will help you to identify your options and narrow down your choices. We suggest what you could do, but we won't tell you what to do or where to lend; the decision is yours. We are responsible for the accuracy and quality of the information we provide, but not for any decision you make based on it. The material is for general information and education purposes only.
We are not financial, legal or tax advisors, which means that we don't offer advice or recommendations based on your circumstances and goals.
The opinions expressed are those of the author(s) and not held by 4thWay. 4thWay is not regulated by ESMA or the FCA. All the specialists and researchers who conduct research and write articles for 4thWay are subject to 4thWay's Editorial Code of Practice. For more, please see 4thWay's terms and conditions.
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