Funding Circle’s UK managing director Lisa Jacobs talks to Andrew Saunders about her new role, regulation and why she’s more confident than ever about the future of the business…
Did 2019 mark the end of the honeymoon period for peer-to-peer lending? A flurry of platform failures, the arrival of a new, more proscriptive regulatory environment and doom-laden headlines warning of impending economic slowdown certainly conspired to put the sector under pressure like never before.
Not an easy time to step up to one of the top jobs at Funding Circle, which naturally attracts more than its fair share of scrutiny – how will the UK’s biggest and highest-profile P2P player – and the only listed one, to boot – perform as the economic cycle begins to turn?
But for Lisa Jacobs, who took over from co-founder James Meekings as UK managing director in September, such challenges are all grist to the mill. If the honeymoon is over, it’s being replaced by a welcome opportunity to prove to naysayers that P2P lending is not just a fairweather success story but here for the long haul. “We feel very confident, it’s a really exciting time for the UK business,” she asserts. “I’m like, ‘Bring it on’.
We’ve focussed on how we ensure that our book and our credit models are as resilient as they can be. We’ve stress-tested the book – ‘What happens in these different scenarios?’ And even if losses doubled, our investors would still make money.” The platform also keeps a close eye on risk, but apart from tightening up criteria on some higher-risk loans last year, it’s largely been a case of watching and waiting.
“We keep monitoring and we will take action when we need to,” Jacobs says. “But we’ve not seen any further deterioration.”
With £3.7bn of small business loans under management, 80,000 investors globally and nearly a decade of experience and credit data under its belt, you might expect that Funding Circle would be in a better position to cope with adversity than some of the smaller P2P platforms. How does she think the industry as a whole will stand up not only to tougher economic conditions but also to the raft of new regulations introduced by the Financial Conduct Authority (FCA) in December?
“We’ve always been big supporters of regulation,” Jacobs comments. “I think the new regulations are really positive and set a good bar across the industry. We’ve seen some businesses leaving – some on good terms, some on less good terms – but this year I think we’ll see a strengthening of the industry, a bit of a reset.”
While there has been controversy over some of the new rules – particularly the investor marketing restrictions – Jacobs believes that the FCA has managed the transition to the new regime as well as it could have done. “I think they have been very consistent in what they set out to do,” she says. “In 2014 they said, ‘We’re going to do this now, then come back in a couple of years and review the market.’ We were all quite innovative business models.
They are learning too, about how to regulate an evolving industry.” That’s not to say that 2020 will be business as usual, however. “I think there’s an inevitability about a new industry that as it matures, you will start to see a shake out.” So there may be more platform failures like Lendy and FundingSecure to come, but the end result, she believes, will be a more resilient and “grown up” market for lenders and borrowers alike. “I think we will see a bit more of that, but it’s a natural progression – I don’t think people should get panicked by it,” she comments.
One of the other big questions hanging over the sector at present are the prospects for retail investors: as more and more platforms become increasingly reliant on institutional funding, will the smaller investors who helped build the industry get left behind? It’s a longstanding concern that has been given new impetus by falling returns across the board and recent announcements from Landbay and ThinCats that they are exiting the retail market entirely. But Jacobs reckons this is more a question of an individual platform’s strategic response to tighter regulations around retail funding, than the beginnings of a wider retail wind-down.
“If you have a very small portion of your platform which is retail, and there is now a higher bar from the regulator in terms of what they are expecting you to do – that’s my sense of what is really driving it,” she explains. “And if you’re a retail investor, you should be happy that the bar is being set at a higher level.”
She also points out that such managed exits mean that investors will not lose any money as a result. “ThinCats and Landbay have managed their books in the right way, so that there is no consumer harm,” she adds. “I would hope that can set the standard for any further changes across the industry.”
As for Funding Circle, it’s not a question of choosing either retail or institutional funding, but rather of striking the right balance between the two. “What’s important to us is the diversity of different funding sources,” Jacobs says. “We want to have a very sustainable long-term platform and in order to do that, we need diversity of funding that delivers great returns across all the different funding sources.
“On a loan-by-loan basis, we are not prioritising institutional over retail. The loans our retail investors get are the same loans that institutional investors get. That’s a real positive for our retail investors – they are investing on the same terms as the institutions are, and getting the same product and the same returns. That’s quite rare.”
All the same, Funding Circle has faced criticism from retail investors, particularly over the way it handles loans on its secondary market. Average resale times on that market rose from 100 days in September to 124 days in October, prompting the introduction in December of a new tool to boost liquidity. “Historically our secondary market has been very liquid, but what we found [last year] was that investors were waiting longer to access funds,” Jacobs says.
“So what we did was to think about how we can start to give investors funds, more quickly.” Having previously operated a taxi rank system where sellers had to wait until they reached the top of the queue, investors can now start selling off portions of their loans much more quickly. The available liquidity is automatically shared out around everyone wanting to sell, rather than limited to those at the front of the line.
That way, at least some money lands in sellers’ accounts on a regular basis. Even if completing the disposal of whole loans still takes a while, investors can see that progress is being made. The new scheme has not been without its critics however – established investors who had been patiently waiting their turn to sell understandably feel that they are losing out to newer punters now allowed to ‘jump the queue’.
It’s a case of trying to give the greatest benefit to the greatest number, she says. “We did think hard about what would provide the best outcome for all of our investors as a whole. Whatever solution we came up with, there were going to be a small number of investors who felt hard done by.”
Since its hotly-anticipated initial public offering (IPO) back in 2018, Funding Circle has also had to get used to the vicissitudes of life as a listed company. Its shares – which floated at 440p – dipped to an all-time low of 78p in January. A hefty drop, even allowing for the fact that private investors and public markets often don’t see eye-to-eye on company valuations.
But fretting about the latest price is not really the point, according to Jacobs, who in her previous role as chief strategy officer was part of the IPO team. “We don’t look at it on a daily basis,” she states. “The share price moves due to things that aren’t in our control. Our focus is on how we build a really great long-term business, that supports thousands of small businesses and provides a great return for our investors.”
If they get that right, she adds, then the market will eventually recognise the value. Besides, having helped Funding Circle grow into the international business it is today, there is no doubt in her mind that the IPO was the right thing to do. “What it allowed us to do was to build up a really strong balance sheet – if you look across the balance sheet of UK platforms we are the best capitalised,” she says.
“It’s enabled us to innovate and launch new products by ceding some of that balance sheet to grow those products. I am very happy that it was the right thing to do.” That balance sheet cushion also relieves Funding Circle of the need to keep raising equity funding – something that may become more difficult as the economic cycle turns – and frees up management time to think more strategically.
Over the coming year, her priorities are to continue to use technology to automate more processes and improve the customer experience, and to serve more customers, both directly and through a developing programme of referrals and partnerships. “We started a pilot this year referring businesses to other lenders, which is something quite different from what we have done previously,” Jacobs comments.
“But we have a really good brand here – our net promoter scores are over 80. If a business wants to access finance, but for whatever reason we can’t support that, then being able to offer them an alternative solution is really useful.” It’s the kind of market power that comes with scale, something that Funding Circle has a lot more of now than it did when Jacobs joined the then-40-strong start-up back in 2012.
She even remembers having to “steal” a desk on her first day because there was nowhere for her to sit. There are now around 1,000 employees across the whole business, and she has her very own desk opposite that of co-founder and chief executive Samir Desai. “We’ve come a long way and really built up the talent we have got, and the governance,” Jacobs says.
“What has stayed the same though is the culture of the business – even early on were always conscious of how to keep that fast growth, fast moving culture as we mature. The personality of the business has remained remarkably similar. It’s what sets us apart.”