Route to market: P2P customer acquisition
P2P customer acquisition is changing as new regulations loom. Hannah Gannage-Stewart reports
Customer acquisition in any industry is expensive. There are various ways to approach it, and in digitally native industries such as peer-to-peer lending, the internet is an obvious pipeline.
But whether lenders decide to use social media, SEO-optimised Google search or price comparison websites, there is a cost and once a business is at scale, it’s likely to be one of the bigger budget lines.
To determine the value of different approaches to acquisition, businesses divide the lifetime value (LTV) of the customer, or the average revenue a customer generates across a specific period, by the cost of acquisition (CAC).
Read more: Does TikTok present an opportunity for P2P lenders?
This reveals whether the LTV is exceeding the CAC, which certainly once a brand is established, is the name of the game. For this reason, keeping CAC low is a good way for scaling businesses to control costs and make sure each customer is contributing to revenues.
Simple Crowdfunding co-founder Atuksha Poonwassie says social media is a big part of her platform’s brand-building strategy and a way to educate potential users about P2P.
However, Simple Crowdfunding sees most of its business come via word of mouth or through Google search. Poonwassie credits the relatively frictionless acquisition process, in part, to being an early entrant to the market in 2013. But she acknowledges that her first-mover advantage could lose momentum as the market matures.
Like all P2P lenders, the growing onus on regulation informs Simple Crowdfunding’s approach to acquisition, and customer onboarding. “We have to treat them all as restricted for the purpose of what we’re doing,” she says. “It’s making sure that the messaging that’s pushed out is appropriate, that the management and tracking of all of that is consistent.”
Existing marketing regulations are set to get tougher. In August the Financial Conduct Authority (FCA) published Policy Statement 22/10, ‘Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions’ (PS22/10).
The new measures strengthen existing rules around the promotion of high-risk investments. These include strengthening risk warnings, banning inducements to invest, introducing positive frictions – such as the introduction of a 24-hour “cooling off” period – improving client categorisation and stronger appropriateness tests.
Read more: New financial promotion rules will cost £135 per investor
The more prominent risk warning rules will take effect from 1 December 2022, while the remaining rules are due to come into force from 1 February 2023.
These regulations may affect platforms who lend to property professionals and small- and medium-sized enterprises less than those in the consumer space. Platforms dealing with major asset-backed loans tend to have more sophisticated or high-net-worth investors, who are likely to pass appropriateness tests with relative ease and understand the nature of the risk they’re taking.
Conversely, platforms catering to individual consumers who have a larger retail investor base may find fewer prospects can proceed to join their platforms. For Folk2Folk’s managing director Roy Warren, this can only be seen as a positive move for the sector, building in greater consumer protection, and consequently building trust in P2P more generally.
“Some platforms will already have the right type of customer, whereas for others this further regulatory requirement in the form of the new financial promotions rules will naturally filter them out,” he explains. “I think it’ll be the platforms that don’t already have the right customer base that will have to adapt their marketing to attract the more appropriate type of customer.”
Indeed, Warren stresses P2P lending is not for everyone, saying that “some people should naturally keep their money in the post office.”
Does this threaten the democratisation of finance – something that P2P has prided itself on for many years? In Poonwassie’s words, “the beauty of crowdfunding and P2P lending, is it makes investing accessible to everybody who understands what they’re getting involved with.”
Warren can imagine a world in which fewer individuals make the grade, but he believes it is necessary. “I don’t think anybody could argue that that’s a bad thing,” he asserts. “You need to make sure that they understand the risks and I think that just naturally means some people are in a position to take that risk and some people aren’t.”
For Folk2Folk, which specialises in business loans backed by both retail and institutional investors, the new rules will mean enhancing the risk warnings in their marketing and throughout the customer journey, including the customer onboarding process, to ensure consumer understanding of the risks. But it will not require significant changes to the platform’s current marketing approach and is unlikely to alter the demographic of individuals attracted to it.
On the borrower side, Folk2Folk, like many P2P platforms in the business space, uses brokers. The platform says this is more cost-effective than having a large business development team – an alternative method.
It finds attracting investors less straightforward and more competitive, but a strong online presence and thought leadership in that market is part of the mix.
Elsewhere in the market, The Money Platform – a consumer lender focused on short-term credit – finds most of its borrowers through affiliate websites, such as ClearScore or Go Compare.
“The goal, for consumer credit lenders at least, is to try and save on credit bureau costs,” says chief executive George Huntley.
In other words, while customers still need to be independently credit checked by the P2P platform, affiliate referrals make it possible to limit those checks to individuals that you’re fairly confident will pass.
The affiliates charge on either a cost-per-click basis, when you pay for each person who clicks through to you, or they work on a cost-per-approved or cost-per-funded loan basis, which is when you pay them if they end up lending to that particular individual.
“It tends to be the case that better customers come from price comparison websites, they’re people who are interested in finding the lowest interest rate that they can get,” Huntley says. “Whereas people who are not interested in getting the best price are more likely to be lower quality, or more likely to be flagged for fraud risk.”
For Huntley, while retention is desirable after forking out for acquisition, he is clear that The Money Platform does not want borrowers using the site as a revolving credit facility. “We’re trying to build up financial resilience and help customers not to be reliant on this type of credit,” he says. This has a reputational advantage, and Huntley says one borrower recently returned as an investor.
For another P2P consumer lender Elfin Market, which has a product akin to a credit card, social media has been the main route to acquisition.
The lender has an in-house marketing and development team, which generate all the content and track the return on investment, which co-founder Lakshithe Wagalath says is one of the main reasons he likes social media.
“We essentially acquire customers via digital advertisements,” Wagalath explains. “And among all the possible types, the ones that have been working well for us are social media ads.” Facebook and Instagram tend to work best, although he says the firm has used LinkedIn and Google too.
“We are not yet listed on comparison websites,” he adds. “This is something we might consider at a later stage. For us it was much cheaper to acquire people via social media ads, and comparison websites were much more expensive. So, it didn’t really make any economic sense for us.”
This is an example of where the LTV/CAC ratio is driving acquisition strategy. Once Elfin has greater brand awareness in the market and the potential to onboard more, higher-value customers, investing greater sums in acquisition may be worth it.
As the FCA’s new promotions roll out, there is a possibility that some target users are filtered out. Alternatively, we may see a drive to simplify products and educate more consumers on both the value and the risks associated with P2P. Ultimately, the more consumers are able to make genuinely informed choices, the less the new regulations will bite.