Exclusive with Rhydian Lewis: A moment in time
RateSetter was one of the Big Three platforms, until Covid hit and it was acquired by Metro Bank. Kathryn Gaw finds out what really happened behind the scenes of P2P’s most consequential deal…
It has been two years since the first major acquisition of the peer-to-peer lending world. On 14 September 2020, Metro Bank announced that it had completed its acquisition of RateSetter in a deal worth an initial consideration of £2.5m, with up to £9.5m to be paid out after the completion of the deal.
Peer2Peer Finance News can reveal that the remaining £9.5m has now been paid, meaning that the platform sold for a total of £12m.
Already this is starting to look like the bargain of the century for Metro Bank. Earlier this year, the challenger bank announced that its consumer lending business had exceeded £1bn for the first time – driven largely by the performance of the RateSetter brand. In 2020, consumer lending represented just two per cent of Metro Bank’s loan book, but during the first half of 2022, it claimed a 10 per cent share.
These past two years have seen RateSetter’s management, loan book, technology and expertise merge into Metro Bank. Former RateSetter chief executive Rhydian Lewis (pictured) now has an office at Metro’s HQ in London’s Holborn. His new title is managing director of consumer finance at Metro Bank, where he oversees the aforementioned £1bn department. He also sits on the bank’s executive committee. Most of RateSetter’s former staff have remained with the brand at its new corporate home.
In 2021, the RateSetter business reached profitability for the first time during its first full year as a Metro Bank brand, with a profit before tax of £4.1m.
All the figures suggest that the merger has been a success for everyone involved. But what is the story behind the numbers?
We sat down with Lewis to get the inside track on the most consequential P2P acquisition to date. Starting at the very beginning.
2020
At the beginning of 2020, Lewis was preparing RateSetter for an initial public offering (IPO). This was something he had been openly mulling since 2017, as part of the platform’s plan to solidify its position as an “investor brand”. After successfully navigating a slew of new P2P regulations in late 2019, 2020 was set to be the year that RateSetter finally went public on the London Stock Exchange.
And then Covid-19 struck.
“The planning to raise money ahead of a listing coincided almost to the day of the first lockdown,” says Lewis.
“And the P2P industry was not mature enough to receive the level of liquidity support that it needed.
“We had to do the responsible thing and look at the interests of protecting our customers and to the interests of our stakeholders and the platform’s stability.”
Practically overnight, the economy was thrown into turmoil and P2P platforms had to make some tough decisions about whether to pause lending, ban withdrawals, or carry on as normal and hope that things would work out. As one of the largest consumer lending platforms in the country, RateSetter was particularly vulnerable to the sudden risk of borrower defaults.
Read more: RateSetter’s Rhydian Lewis: Our absolute focus is on existing customers
Lewis remembers this as an incredibly complex time. The fundamental value of the platform had not changed, but the short-term risks threatened to reduce liquidity beyond an acceptable level. The coverage ratio of RateSetter’s provision fund fell from 113 per cent to 74 per cent within a single month. When the coverage ratio falls below 100 per cent, it triggers a nine-month stabilisation period. This, coupled with lower demand for borrowing and investing, meant that Lewis had to make some very difficult decisions.
“We knew that the borrower side of the business was very high quality and had growth potential beyond what was visible in terms of the P2P investing side of the business,” explains Rhydian. “But of course we saw a collapse in demand in that period.
“We had to deal with an extraordinary level of uncertainty, which required immediately thinking of what was in the best interests of our customers – both investors and borrowers. With borrowers it was about supporting them through forbearance and then the mandatory breathing space. And for investors, it was about how to protect them as best as possible.”
Lewis’ priority became getting the platform through the “extraordinary times” of March and April 2020. In May 2020, he entered into talks with Metro Bank.
In February 2020, Metro Bank had publicly stated that one of its strategic objectives was to shift its balance sheet towards higher-yielding lending by offering more consumer loans. Metro also said that it wanted to enhance its digital offering. An opportunity emerged.
“Metro approached us,” Lewis confirms. “RateSetter offered a great way to do that in a way that would be faster than an organic route and Metro would be buying a business with the people who have the right skill sets and experience and technology.”
Lewis describes the acquisition talks as “very professional” with “thorough” due diligence. Talks concluded with an acquisition announcement on 3 August 2020.
The rapid pace of negotiations and the relatively low price of the deal sparked no shortage of industry chatter. Early estimates suggested that Metro would pay between £25m and £50m for RateSetter, which was described as a “knockdown price” by industry analysts. In the end, RateSetter sold for less than half of the most conservative estimate.
Lewis won’t be drawn on whether he believes Metro Bank got a bargain. “Timing is everything,” is all he will say. “I have no regrets.”
“Things conceived in extraordinary times are different from those conceived in wonderful times,” Lewis adds.
“I think it’s worth passing one’s mind back to what the atmosphere was actually like in the first lockdown. There was a period in the first lockdown when no one had seen this before.”
2021
2021 began with the end of RateSetter’s nine-month stabilisation period. By then, the retail investment side of the business had already been closed off and was in runoff. In February 2021, Metro Bank acquired RateSetter’s loan book for a cash consideration of £384m. While we don’t know the total value of the loan book in February 2021, by June 2020, RateSetter had a loan portfolio of approximately £850m, representing more than 84,000 lenders.
In acquiring the loan book, Metro Bank also acquired the RateSetter provision fund, which Lewis refers to as “the insurance policy” of the platform. This pool of money was funded by a small investor fee, which was automatically taken every time an investment was made. The idea was that in the case of any losses, the provision fund could be used to repay investor capital.
By the time of that Metro Bank bought the loan book, no capital losses had been incurred by any of the platform’s investors, therefore the provision fund remained unused.
For Lewis and his team, the rest of 2021 was spent integrating with Metro Bank – a process that seems to have been relatively smooth for all involved. Lewis believes that this is due to the aligned cultural values of both businesses.
“RateSetter has always had a real focus on customers,” he explains. “And Metro is famous for its customer focus. So I think that was a cultural bridge, which is important because there has to be something to meld the two organisations.”
“Quite often acquisitions don’t work,” he adds. “But Metro have integrated a fintech very well, which reflects well on Metro.”
However, despite the success of the deal, Lewis doesn’t believe that anything similar will happen again in the P2P world.
“This was a moment in time,” he says. “Metro had the foresight and courage in a very uncertain time to acquire.
“It was a landmark transaction. Will there be others? Yes. Will they work as well? I don’t know, because I think that what drives us is that there was a mutuality to what was needed for RateSetter and Metro.
“I feel very proud of having integrated with the bank. I think the growth that RateSetter has managed to generate under Metro’s ownership has been certainly in line, if not exceeding expectations.
“It’s been a great success.”