What Have Failed P2P Lending Sites Got In Common?

By Matthew Howard on 8th October, 2019 | Read more by this author

More common than closing down with fraud or incompetence hanging in the air, most platforms that stop doing peer-to-peer lending are simply closed because they have failed, stopped offering P2P lending products, or needed to be saved by other platforms.

You never hear about most of the ones that close, because they never make it far enough to arrange their first loan.

Some of the regulated P2P lending sites that you may have heard of which then went down one of those paths include:

GraduRates (closed down, transferring its loans to RateSetter).
Fruitful (stopped offering P2P lending products and appears to be inactive).
Encash, formerly Yes-Secure (closed down).
First Great National (disappeared without a trace).
Quakle (closed down).
Wellesley & Co. (no longer offering P2P lending products).

What have they all got in common?

In most ways, the above businesses are very different from each other. They have lent to postgraduates, professionals, the general public, small businesses, short-term (bridging) property loans and property development lending.

They have been tiddlers, lending in the low thousands, or giants with lending in the hundreds of millions of pounds.

The one thing they have in common is that they have not been transparent: they haven't been transparent about their records, they haven't been open about their operations, and they were unclear in the information they provided. They appeared secretive or they were ambiguous.

As of now, the same applies to all regulated peer-to-peer lending sites that started lending and then closed down in the UK.

Notice that the same is also true for the naughty, closed peer-to-peer lending sites that were operating without the required permission from the regulator, such as Collateral UK.

It won't always be this way, because certainly at some point even a few transparent P2P lending sites will close. There's a lot of competition among legitimate platforms that are open with information, so we will see that some will merge or be forced out of business, most likely in phases and cycles. This is the case in any industry, including in banking, the investment fund management industry and the insurance industry – all industries that have similar traits to P2P lending.

But the clear pattern so far demonstrates that we can hugely reduce our chances of lending through a P2P lending site that either closes down or stops doing P2P by ensuring we are getting enough information before we use them.

What are the risks to lenders if a P2P lending site closes?

The risks are quite small of losing money when you lend through a regulated P2P lending site that closes down. But it is not without risks.

It causes some lenders anxiety, it can delay repayment of our loans, it can lower the interest we receive, and the risk of losing some of our lent money is not zero.

How can you avoid P2P lending sites at high risk of closure?

There is no fool-proof way of spotting which P2P lending sites are going to collapse or close, because we can all get caught out. But we can greatly increase our chances by knowing how to spot the open and transparent P2P lending sites.

The easiest way

A very simple way is to go to 4thWay's peer-to-peer lending comparison table or IFISA comparison table and look for a combination of two things:

1. Can you find an entry for the P2P lending site?

Firstly, if the peer-to-peer lending site has no entry in the comparison tables, it means that it has not shared enough information with us since the beginning. It has not provided the 100+ data points our experts require, or submitted itself to our email Q&A sessions and to senior person-to-person interviews. It is therefore safe to assume it has not been open with us at all.

This puts it in the category that is more likely to close.

2. What does the Quick Expert Review say about its openness?

Even if it is listed in our comparison tables, you'll need to take a second step, because it might not have provided (or no longer provides) enough information for making what our experts think is a sound judgement of the risks.

Again, you can find out if that is the case through the comparison table: look at the reviews under each comparison entry, each of which is written by one of 4thWay's experts. There you will learn what gaps the expert has found in the information provided.

Another quite easy way – with a checklist

If you want to take knowledge into your own hands and be a more active lender, and I strongly encourage you do, you can also check for yourself how open a P2P lending site is.

The following checklist is by no means everything you need in order to assess how good a P2P lending site is. It won't tell you, for example whether the people behind its operations have the required skills and experience or if its interest rates are acceptable for the risks.

But:

If you'd followed this simple checklist, you would not have lent in any of the P2P lending sites that have failed so far!

So I reckon this simple list of checks would cover the average lender for maybe 19 out of 20 cases in future:

Does it have lots of detailed website statistics that are dated and is the date less than six months old?
Are the statistics clear and understandable to you – not ambiguous?
Does it show how much money has been lent in total?
Does it show how much money is being lent right now?
Does it show how much of the loans are suffering any late payments right now compared to the outstanding loan book (not compared to the entire historical loan book, which flatters the figures)?
Does it clearly explain how they define late (e.g. a loan might be classed as late if the payment is over 45 days late or when there is reason to believe it will become late)? In the UK, for regulatory reasons, you'll see more often that 90 days late is used.
Does it show how much debt has gone bad against the entire historical loan book?
Does it have a clear definition of what it classes as bad debt?
If it glosses over bad-debt statistics altogether – assume the worst.
When there are related statistics, do they appear to add up. For example, if it says that there is £1 million of bad debt and £100 million has been lent, then you would expect the all-time/lifetime bad-debt ratio to be 1%. If it says the ratio is something else, that is a warning sign.
If its bad-debt statistics are based on the “current” loan book rather than the entire historical loan book, which does happen, this is misleading. Assume the worst – that they are deliberately hiding the full scale of their bad debts.
If the P2P lending site has lent tens of millions of pounds or more and it claims to have had no bad debts, does it give a plausible reason why? Avoid if it doesn't – assume the statistics are simply not accurate or are misleading.
Does it show the total pound amount of interest earned by lenders and the average interest rates after fees and bad debts?
If the website draws your focus to statements or statistics that there have been “no losses to lenders”, does it also mention how many “defaults” there have been? (A “default” is when the loan is worse than just late. In contrast, a loss – or write-off – is when the P2P lending site throws in the towel and admits it can't recover at least part of the debt. Both outstanding defaults – not recovered defaults – and losses added together are all the “bad debts”.) A common trick from non-transparent sites is to just show losses, but then refuse to class any defaulted loans as losses for a very long time to in order to pretend they have a clean record.
For secured lending, does it tell you how large the loans are on average compared to the value of any property that can be repossessed from the borrower and sold on your behalf? This is called the “loan-to-value”.
Does it explain how the loan-to-value is calculated, e.g. for developments is it against the hoped-for sale value of the property? (Which is often called the “loan to gross development value” or LTGDV.) An explanation probably isn't necessary for straightforward lending to e.g. buy-to-let landlords.
For secured lending, does it state who calculates the value of the security (e.g. independent RICS surveyors)?
Do they share copies of valuation reports with registered lenders?
If there is a reserve fund to cover expected losses, does it explain how large the pot is, especially compared to the amount of loans that are covered by that pot?
Does it clearly state that the reserve fund is pre-funded and properly segregated from the P2P lending site's own funds?
Does the website have a phone number? That's always a good sign. I urge you to call it and ask for more information about how they approve loans or what their process is when a loan goes wrong. If you call a good P2P lending site, this will help you to learn faster how to assess them all better.

If any of the above is missing, does it make the site “bad”?

No, the list above is to hugely reduce the chances of lending in P2P sites that are going to close.

But there are sites that do good loans that don't provide all the information in that checklist publicly. These ones are harder to spot and therefore you will need to build your knowledge before you can use those.

To begin with, you can cross-reference your own research with 4thWay's comparison tables.

For example, CapitalStackers* provides surprisingly little information publicly about its record, and yet with 4thWay it has been extremely transparent, sharing more detail of its lending models than any other P2P lending site, answered all of 4thWay's experts' detailed questions candidly and in a down-to-Earth manner, and it provides them with a regular update of its full loan book. It has impressed our expert who wrote the CapitalStackers Review.

Fend Off Peer-To-Peer Lending Fraud & Incompetence – A Checklist.

How To Check The Financial Services Register For Monsters.

Lendy Sends Shockwaves But No Surprises.

To learn more about assessing P2P lending sites, see our Learn page.

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.

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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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