Untapped potential

Mansour Bouaziz, founder of new P2P consumer lender Elfin Market, tells Andrew Saunders how he’s going to revolutionise the credit card market…

THE CREDIT CARD IS one of the most successful consumer finance products of all time – there are 60 million of them in the UK alone, accounting for around £17bn of spending every month. What if the peer-to-peer business model could do for credit cards what it has already done for personal loans – bring down prices, democratise availability and streamline the application and approval process?

That apparently simple idea inspired Mansour Bouaziz, founder of P2P credit platform Elfin Market, to quit his job at Goldman Sachs – a job that many in the financial services sector would regard as the pinnacle of their career – and go it alone.

“I was looking for an opportunity to do something that had not been done before,” he says. “So I studied retail finance to see which products were already being covered by successful start-ups and which were still only in the hands of legacy banks and providers.

“Credit cards were the one thing that the start-ups were missing. I couldn’t find anyone who had tried to do it, not only in the UK but anywhere else in the world either.”

But it’s one thing to have a great idea, quite another to make it happen. The received wisdom on financing consumer credit is that it can’t be done without a substantial balance sheet buffer – the sort of balance sheet that only banks and major financial institutions enjoy.

“I understood fairly quickly that the reason it had not been done is that it is a bit more complicated than personal loans for example,” Bouaziz explains. “In credit there is a liquidity element – you don’t know when customers will use their line of credit, or how much. So as a P2P it is harder to match your funds and get good returns for your investors.”

So what makes Bouaziz confident that as a brand new entrant to the market he can make P2P work where the established players have feared to tread?

Read more: New P2P lender aims to disrupt the credit card market

“At Goldman Sachs I spent a lot of time on credit risk and liquidity, I was comfortable that I could solve these problems for investors in credit derivatives, it was just a question of translating that into the retail market,” he states.

“The skills required exist in the institutional space at investment banks, it’s just that no-one has bothered to port them to the retail sector to make credit cards much cheaper until now.”

Elfin’s product is an online credit account called the Elfin Wallet, similar to a commercial revolving credit facility but aimed at consumers. Currently in the beta phase, it is being rolled out to the platform’s 2,000 strong waiting list with a ‘soft target’ for full launch in the summer once testing is completed.

Offering a representative APR of only 5.8 per cent compared to typical current credit card rates of around 19 per cent, there is likely to be no shortage of demand from the borrower side. But can Elfin provide decent returns for its investors, as well as a margin for itself, at such low prices?

“We’re confident in our risk management capabilities,” Bouaziz asserts. “Our rates for lenders range between 3.8 per cent for smaller amounts over six months to 5.8 per cent for three years. We’re comparable to but slightly higher than the main P2P lenders, and we hope that small difference will encourage people to try us out.”

His confidence is based, he says, on two main advantages over the competition – targeted lending and smarter processes. “Across the whole credit card population, about half pay their balances off every month and effectively get free credit, the other half carry a balance and pay interest monthly. The latter end up subsidising the former and that’s one of the big reasons that credit cards are so expensive.”

Elfin’s product is aimed firmly at the balance carriers, those borrowers who actually use the credit rather than simply enjoying the benefits of card payment. “Our product doesn’t come with a grace period so we are targeting people who want to  borrow money not just accumulate miles,” he explains. “They don’t subsidise anyone else, and that alone allows us to cut the rate by almost half. The rest is just being more efficient about technology and credit risk management.”

Read more: Special report: P2P consumer lending

When it comes to the thorny problem of managing liquidity, Bouaziz says that while Elfin won’t have a bank-style balance sheet, it will have a buffer – composed partly of the lenders on its waiting list, and partly of back-up lenders ready to step in to cover unexpected surges in borrowing. “Like all P2P platforms we have a queue of new investors who don’t see their money being invested straight away – there is a delay of a few days or maybe a week. That money allows us some room for manoeuvre.

“The second thing is that we want to have some back-up institutional investors. These emergency lenders will allow us to handle the situation until we get new retail investors in.”

This back-up function is currently being provided by a number of high-net-worth investors but the intention, says Bouaziz, is to replace them with hedge funds or other institutions in the “not-too-distant future”.

All the same, the issue of matching funds is likely to be a pinch point. “We’re aware that this is easier to solve for borrowers than it is for investors, and that in the first year at least the number of investors is going to be the limiting factor on our growth.”

To help boost that flow, Elfin will offer an Innovative Finance ISA. “Clearly it’s a way to attract more investors. We want to give them that [tax-free] option, and there has been a fair bit of interest.”

The platform has raised £500,000 so far from angel investors and contacts via two rounds of funding, and Bouaziz says it has enough in the kitty to see it through to launch. He anticipates another ‘friends and family’ raise, and there is the possibility of a crowdfunding round in the offing too. “Fundraising is now a way of life. It’s hard and time consuming, but we are getting better at it.”

The hardest thing of all to date? “Without doubt getting our Financial Conduct Authority (FCA) authorisation,” he says. “It took over 18 months and was difficult because we have an innovative business model.” The legal and other expenses – paid for out of savings from his banking career – were another major hurdle. “Not all founders would have been able to go through the process without having to raise outside money,” he acknowledges.

“It is easier in the UK than in many other places – the FCA does care about helping innovative start- ups get to market. But I do admit that I would have liked it to be faster and especially cheaper.”

A mobile app is under development, as is a deal with a third-party provider to offer an actual card alongside the online wallet account, transfers into which are currently made via bank transfer. “It’s quite fast but we are aware that it’s not quite as user friendly as a card,” he says. “So we want to offer that option too.”

Although it’s early days for Elfin, Bouaziz has growth plans to match the ambition of his bold new business model. “In consumer lending the big P2Ps like Zopa and RateSetter account for about five per cent of the total market. We hope it will be the same one day for credit cards and we’d like to be one of the big players.”

This article featured in the June issue of Peer2Peer Finance News, now available to read online.