The Anonymous Widower

Regional Finance

I have a bit of form in this area, as I was a partner in a small finance company in Ipswich, which was setup, when I sold my stake in Artemis. The company lent money to local individuals with good credit ratings for quality products like cars, trucks and various forms of machinery. It was profitable and it was eventually bought up by one of our sources of finance.  My partner in the business has continued lending money since, but recently he has had problems obtaining wholesale money at a reasonable price. The withdrawal of ING from this market has not helped and the result is that businesses are having to pay more for leasing contracts.

Locally-based or regional finance is an opportunity for someone to step into the gap. Funding Circle have created what they call a Local Business Lending Partnership with Lancashire County Council. It is a small step in the right general direction.

I’m a great believer in peer-to-peer or social lending for three reasons, having invested around £100,000 of my savings in companies in the area.

1. It gives lenders a better return on their savings. I consistently get 4-5% before tax after all charges and bad debts on Zopa.
2. It gives borrowers access to affordable loans with very fair terms.
3. Because of the way they run their businesses, peer-to-peer lenders have a low bad debt rate, which is much better than those of established banks.

The only downside is that lenders’ money could be at risk.  On the other hand, if you use a social lender sensibly, like I believe I have, you can minimise your losses.  In four years on Zopa, with tens of thousands invested, I’ve only got a few bad debts that total just over four hundred pounds. Possibly due to Zopa’s collection method, this figure is reducing.

Others have not been so lucky, but then I am by training a control engineer, with extensive experience of modelling financing and lending systems.

So is Funding Circle’s approach of a Local Business Lending Partnership a good one?

It’s an attempt to target money, but then as Dieter Helm has said “Ministers who try to pick winners should remember that losers tend to pick governments.”

Politicians and money are rather a toxic mix. They should stick to enabling good practice by sensible laws and rules.

I know Zopa well, so what does their system have that is good. I mused in this post that Zopa might be a stable system, where borrowers and lenders find a sensible balance between their needs. Nothing I have learned since makes me believe I am wrong.  In fact Zopa is in some ways so stable that I hardly ever change the interest rates that I charge.

Zopa too, has very good credit checking, which I know is the key to successful lending businesses. Royal Bank of Scotland appreciate this now.

The Zopa model is also so simple, that the average eight year old would understand it.  This simplicity means that anybody can invest and lend money from a few pounds upwards and borrowers only face a thorough, but not particularly onerous checking process, before the computer allocates all the funds.

Because of its computer system, Zopa is infinitely scalable.  At the time of writing it has lent about £250,000,000 in seven years and if it were to be lending say ten times more, it would only need to increase staff in the back office.

I suspect too, that a lot of what I’ve said here applies to other social lenders like Funding Circle and Ratesetter. But I have not been investing in those companies for anywhere near like as long!

Zopa is unique in that it doesn’t allow the lender to have any choice in the borrowers they lend to. All lenders can do is choose markets and set rates. The computer then does the allocation, which are then thoroughly checked by a team of expert humans.

So in my view Zopa is the purer and more stable system from a control engineering point of view.

It also requires the least intervention from the lender to run successfully, which probably explains why it is the largest peer-to-peer lender.

Funding Circle may get success with its lending partnership, but I suspect it tends to make administration more difficult and requires intervention from lenders. It’s also open to skewing by politicians, who favour their friends.

So could a regional element be built into Zopa?

I believe it can and Zopa’s model is absolutely the right one to regionalise.

You would not change anything major to the computer system or the way the staff work.

The first thing you would do, is to add a facility which is common in on-line dating and car sale systems. You can type in your post-code and say you’d like to meet someone or find a car  within say twenty miles or so. Obviously, a guy in Carlisle doesn’t want to meet a lady in or by a car from Penzance!

But people have strong regional affinities and an investor in say Suffolk, might like most of his money to be lent out there. Especially, as they might get a £50 bonus from Zopa for introducing a borrower. Traditionally, these bonuses get spent on something like a shared meal, so it’s an unusual form of creative cash-back. Imagine how this could percolate through something like a golf or tennis club, or a school common room.

So I would allow lenders to restrict their lending to those that lived within a certain distance.

This would also have a marketing advantage as people would like to think that their savings were helping others where they lived.

But of course, there would be no deterioration to Zopa’s bad debt rate, as the same credit checks would still apply. In fact, this regional element might mean that those with better credit ratings went to Zopa, as they would prefer the profits to stay in their local area, rather than to the City.

So yet again, we see how feedback and control engineering principles can be applied to make a system better.

Zopa’s company model also allows credit checking and other processes from anywhere, as that is what the Internet is for.

So they could move some checking to regional areas, if they wanted, to use local knowledge and promote the company.  But this would hardly involve them in vast expenses, as they would just be putting a bum on a different seat.

Other tweaks could also be added, but whatever is done, mustn’t compromise the simplicity of the system.

November 17, 2012 Posted by AnonW | Business, Finance & Investment, World | Banks, Funding Circle, Ratesetter, Zopa | 1 Comment