P2P Guide

19 18 P2P BUSINESS MODELS P2P BUSINESS MODELS Main Methods of Risk Mitigation 2.2 Co-Investment Some platforms invest their own money alongside their investors’, an indication of their confidence in the strategy plus a strong alignment of interests, and an additional layer of protection in the event of default. Security Loans are secured against property or other items of value. Typical in the P2P property sector, but used elsewhere too, e.g. business assets. Provision Fund (Reserve fund or Contingency fund) All borrowers pay a small levy which is used to build up a provision fund to cover any losses. The depth of coverage offered by a provision fund varies from platform to platform (around 1%-7%) as do the circumstances that trigger its use. Credit Assessment Undertaken by all platforms, borrowers’ creditworthiness is assessed and scored using proprietary methodology. Diversification Most P2P platforms make diversification simple, fast and cheap to achieve. Investment Options 2.1 There are two other investment options that help investors diversify across platforms: • AGGREGATORS PLATFORMS that allow investors to access loans from across the P2P market on a single wrap platform. • PURCHASING SHARES in investment companies that are investing in P2P loans. Finally, some platforms also issue their own bonds to investors as an alternative vehicle to get exposure to large segments of the loan book. Individual Loan Selection Lenders select suitable loans from the ones listed on the platform’s website. Automated Discretionary Loan Selection Similar to above, however, the lender sets their investment criteria and the website automatically purchases loans that meet the criteria. Discretionary Managed Portfolio of Loans The lender does not choose individual loans (either manually or with pre-set criteria) and can’t select term/interest rate. Instead, the platform only puts loans on the platform which meet its agreed risk profile. Lenders are given diversified exposure to the loans within the platform’s loan book. Direct The lender does not choose individual loans (either manually or with pre-set criteria), but selects a predetermined investment amount, term, interest rate etc., and then is given diversified exposure to new loans within the platform’s loan book that meet those conditions. At a time when the approach of more traditional lenders, particularly to small businesses, comes under increasing scrutiny, the peer-to-peer lending sector has a positive story to tell which continues to drive marked levels of growth in borrower and lending volumes. ROBERT PETTIGREW, P2PFA, JANUARY 2018