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How To Set Up Your Own Personal Bank

By Matthew Howard on 12th August, 2015 | Read more by this author

Peer-to-peer lending is not quite like any other investment. It's really like being your own personal bank. But you don't do all the hard work! No. Because you own the bank. So others do most of the work for you.

Setting up your bank

As a banker, your main job involves hiring the right staff to operate your bank for you:

  • You hire some people to do the risk modelling, which helps you decide who to lend to, as well as to continually learn how to select borrowers better.
  • You hire other people to do the underwriting, which is taking borrower details and referring to credit reference agencies and other sources, and then deciding whether to lend to the borrower and at what interest rate.
  • You hire other people to find and attract those borrowers and take the loans from application to completion – so-called “loan origination”.
  • And you hire some more people to process payments received from borrowers and others to chase bad debts.

Outsource your operations

The good news is that you don't need to hire all these people individually yourself. Instead, you just “hire” a P2P lending company, which has the staff already. They find all your borrowers, credit check them, process their applications and take care of payments and bad debts.

The staff gets paid a salary and you get the profits by receiving the bulk of the interest. (To see the “staff” salary, I recommend you read “There's No Such Thing As No Lender Fee”.

This beats depositing your money in a savings account for a measly 0.5% and then having the bank get the jackpot by lending your money on its behalf.

So when you hire your employees, what are you looking for? In other words, what should you be looking for when you choose a few P2P lending websites to lend through?


Firstly, you want to see they have lots of experience.

With business and personal loans, you want to see banking experience, underwriting experience and risk modelling.

For more niche areas, such as pawnbroking, bridging loans or development loans, you probably want to see a lot of loan origination experience.

Are they methodical and thorough?

Secondly, you want to see if they're good at what they do. The first way to do this is to check the processes they use.

For business and personal loans, do they check more than one credit reference agency – and well-known ones? Do they describe in reassuring detail their criteria or processes for selection, as well as how they handle recovery of bad debts?

Do they have a fantastic record?

You then see that they have a proven history of low bad debts and late payments. And you ensure that they don't approve a worrying number of loan applications (I think roughly 20% or less is usually highly selective.)

Annual reviews

It's that time of year again! You need to keep an eye on your “staff”.

Since you are paying them on a percentage basis it means that the more loans they approve the more money they make. So make sure they don't go crazy rubber stamping everything. Because some of them will!

Watch out that bad-debt rates aren't rising fast – or much faster than similar P2P lending websites. Look to see that late payments are not building up. Loan application rates are not rising too high. And any other criteria that suggest a loosening of standards and discipline in the ranks!



Luckily, keeping an eye on these things is a pretty easy job if you've hired a team that is very open with its figures. And several P2P lending companies are becoming more open than we have ever seen in any investment opportunity – ever!

Look out for the ones that share a lot of information on historical bad debts and late payments. Especially look for the ones that share their entire historical loan books with their website users or with 4thWay®!

Keep your head

Your last task is to keep your head when everyone around you is losing theirs. Your staff might get greedy and the contagion, as it always does in investing, spreads to journalists and financial commentators who should know better.

You have to stick to your lines in the sand and stop lending through a P2P lending website if its standards get slacker or if interest rates fall below a rate you have already said is your bare minimum.

Don't shift your lines in the sand without great reason – and certainly not because some analyst quoted in the FT said “Sure, everything's still going to be fine!”

More! Going back to transparency and doing annual reviews, it's even easier for you to keep tabs on your staff's behaviour if you sign up to 4thWay's Alerts Service, which tracks dozens of indicators for you and lets you know when risks are rising at many of the P2P lending websites.

4thWay® also collects more data than is generally available on the P2P lending websites, and we (a bunch of investors, professional risk modellers and programmers – oh and financial bloggers like me) analyse it on your behalf. So peruse our detailed comparison tables, and read our guides, articles or reviews.

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