Opinion

It’s easy to get swept up in the jargon and minutiae of the alternative finance sector. At AltFi, we tend to focus on what we term as “industry” developments – shifts in structure, surveys, partnerships, investment rounds, securitisations, lending volumes and so on. One sometimes forgets that the underlying platforms are, at their core, retail-facing investment instruments. What better way to learn, then, than to invest? I've invested a small amount of money across each of the UK’s “big three” peer-to-peer lending platforms over the past eight months. Meaningful performance data is of course yet to crystallise. I have, however, learnt a great deal more about how each marketplace functions at the investment level, practical considerations for putting money in and taking it out, and the overall customer experience. These are my key takeaways.

Depositing funds

Both RateSetter and Funding Circle were fairly stress free, as both platforms enable users to deposit funds either via bank transfer or by debit card payment. Zopa, on the other hand, insists that users deposit money via bank transfer. This is not the world's biggest ask, but it does introduce a barrier to adoption. For a while, I simply couldn’t be bothered with the hassle, and I have online banking. For pensioners (a big target group for Zopa), many of whom will not have online or mobile banking, the bank transfer is more cumbersome still, as they'll need to visit a bank branch to arrange it.

Investors will also need to provide Zopa with a photo ID scan before activating an account. Neither RateSetter nor Funding Circle requires this of investors. We understand that Zopa is structured in this way to help to mitigate the risk of money laundering.

Referral fees

Each of the big three offer attractive referral deals for investors. Investors can earn £50 for referring a friend to RateSetter and Funding Circle, so long as that friend invests at least £1,000. For Zopa, the friend must invest a minimum of £2,000. The referred friend will also receive a £50 reward. For investors who are dipping their toes into peer-to-peer waters for the first time, with small amounts of money, these rewards are a significant sweetener. They effectively raise returns up to a decent level from day one, and there appear (for two of the three platforms anyway) to be no strings attached in terms of how long money must be tied up for by referred investors. RateSetter will pay investors £50 for each friend referred, so long as that friend invests at least £1,000, and the referred friend will also get £100 after they’ve been invested for more than a year.

Performance

We at AltFi have the privilege of being able to monitor performance across the big three in uniquely granular detail. We can track net lending, returns, losses, arrears and terms, and can split the data by cohort, risk grade, security, and so on. Institutional investors require this level of oversight. Individual investors, on the other hand, are unlikely to delve so deeply. They simply need some level of assurance that investments will perform as advertised.

As noted above, it’s too early for me to share any meaningful data on the performance of my investments. However, I will say that, at this stage, each of the platforms has performed as expected.

With RateSetter, I invested in the 1 year market at a rate of around 4% per annum. The returns have been as advertised. I received a £25 sign up bonus from the platform, which was invested in the monthly market. I rejigged my preferences via the company website such that this money was invested in the 1 year market once redeemed, which was easy to do.

When I invested with Zopa, there was only one product. That product has now become “Zopa Classic”. Investors in Classic are covered by the platform's Safeguard fund, and should expect an interest rate of around 4.5% per annum. When I invested, I was exposed to 1, 2 and 3 year loans, at a headline rate of 3.8%. Zopa Classic investors are now exposed to 4 and 5 year loans as well, which should pick up returns towards the 4.5% level. My returns are heading in that direction. The new products are Zopa Plus (which allows investors to forego the coverage of Safeguard) and Access (which allows investors to sell out of the platform without paying exit fees). You can read more about these products here.

I invested in Funding Circle using the auto-bid functionality. I set my risk criteria such that I would be exposed only to A+, A and B loans, as this was my first bout of peer-to-peer investing, and I wanted to take a conservative approach. My maximum exposure to any single business loan, as a proportion of the funds that I have lent, is 0.6%. My gross interest rate was 9.2% per annum. My estimated net returns are currently listed as 6.9%. This takes into account tax, fees and anticipated bad debts. My annualised return is currently outperforming expectation, but you’d expect that at this early stage in the lifecycle of the portfolio. I’ve suffered no bad debt and no losses to date.

Monitoring

The monitoring functionalities on each of the big three platforms have been impressive. Each of the platforms disclose their full loan book online, and investors can drill into the data if they so wish. But the challenge for the platforms is to convey the massive amounts of available information in a way that individual investors can make sense of. They achieve this via easy-to-understand account overviews and infographics, which clearly represent the amount of money on loan, the amount of money repaid, losses suffered, risk exposures, net returns, and so on. The platforms also provide regular updates by email.

My one criticism is of the way that RateSetter represents investor returns. I was unable to see my accrued interest on the overview page. This has the potential to damage investor confidence somewhat. The platform explained to me that my interest was in fact accruing, and that I could view exactly how much interest had accrued by exploring the liquidation of my investment. I did this, and saw that interest was on track, and that I could sell out of the platform for an amount that was in line with expectation. But this seemed like something of a roundabout method of tracking my returns, and may give first-time investors the jitters.

Exiting

I in fact went one step further and pulled my money out of RateSetter, due to personal expenditure requirements. The exit fees, which factor in both market rates and platform charges, were meagre. The investment was liquidated in a heartbeat, and the funds were returned to my bank account within a day. The whole process was hearteningly seamless and intuitive, and a strong endorsement for the platform. Bear in mind, of course, that liquidity is a false friend, but in this instance the exit proved smooth.

Customer support

The customer support services for each of the big three platforms was quite simply exemplary. I phoned each of the lenders for various reasons at one time or another, and my calls were each time answered instantly. The people that I spoke with were capable and were able to monitor my account from their end of the call, after having asked a few simple security questions. Most importantly, they were able to explain certain nuances of their respective platforms – quickly quelling whichever worry I had phoned in with.

If the peer-to-peer lending industry is to reach mass adoption, maintaining a high level of customer service will be of crucial import. Investors of all ages will require some hand-holding as they transition into the new-fangled business of peer-to-peer investment. Fortunately, my positive experience does not appear to be anomalous. Both Zopa and RateSetter have won awards for customer service. RateSetter, Zopa and Funding Circle carry Trustpilot scores of 9.8, 9.6 and 9.4 score out of 10 respectively.