We held a Q&A session with a group of investors earlier this month. The discussion was wide-ranging and we wanted to capture the main points in this blog so that everyone has access to the same information.
A. When a borrower is approved for a loan it is then up to them when they wish to return to the market over the following two weeks to take up the loan, and so there is a continual stream of approved borrowers seeking to take up their loan throughout a day. What a borrower pays consists of three elements:
a) the investor rate that is set in our market;
b) the contribution that is required for the Provision Fund; and
c) the fee that is charged by RateSetter
which cumulatively are represented to the borrower as a monthly payment and an APR. When a loan is approved a loan order is initially put onto the market at 0.1% below the latest market rate, this allows any investor looking to match their money quickly to take that rate. If the loan order is not matched at this price it is then put into the borrower queue and matched with investors on the market. This variance in the eventual cost is borne by RateSetter and impacts RateSetter’s margin on each loan.
A. Direct Debits from borrowers are processed every morning, with the time the payments land into the system varying depending on the volume of payments received that day. Many borrowers prefer to pay their monthly Direct Debits at the start of the month and so the volume of payments then can mean the system takes a bit longer to process them all. As each payment settles the money that is settled is then reinvested as per the investor’s reinvestment settings.
A. No. We have internal forecasts for future lending so we can plan ahead, but we do not set lending targets because doing so could have a detrimental impact on underwriting behaviour and the quality of loans being made. RateSetter investors are currently funding between £60m and £70m of loans each month via channels that we are confident in, and we are seeking to grow these numbers as the number of people investing on RateSetter grows.
A. No, we never do this. However, borrowers can and do repay some or all of their loan early without penalty – this helps us attract good quality borrowers.
A. We cannot change a borrower’s APR so when investors sell out of existing loans and quickly reinvest at a higher rate, the market moves higher and RateSetter has to fill the difference in rates on the existing loan contracts. We introduced the Fair Usage policy and deliberately set the ‘time-out’ at 14 days to stop this behaviour. We would like to keep the access to the Rolling market free of fees and the Fair Usage Policy helps us to achieve that.
We wanted to set the ‘time-out’ at 14 days, rather than set it lower and have to bring it up. We would like to be able to bring this down in future if we have evidence that supports doing so.
Of course, the Rolling market is not a current account and it shouldn’t be seen as such. It is an investment, so there are different arrangements to access money. There is a fee for early access to money in each of the markets. The fee is set to zero in the Rolling market where the Fair Usage policy in place, the fee is 0.3% in the 1 Year market and it is 1.5% in the 5 year market.
A. This has always been the case as we wanted to make lending very accessible so people can try it out.
A. Over the last 2 years we have invested in improving the online experience for borrowers, making it smoother and faster along with all the underpinning processes. We are considering a progressive web app for investors, which would automatically tailor the display to the type of device being used. We’ll have more information on this in due course.
RateSetter is currently loss-making, but the gap is closing in line with our forecasts and we expect to break even, excluding spending on investor advertising, in the first half of 2019. Reaching profitability is important but this is balanced with the importance of longer-term investment (i.e. we may choose to invest more in the short-term which will repay over the longer-term).
The sustainability of our business is very important to us, so we spread around half our fees over the lifetime of loans, rather than taking all our fees when a loan is written. This means we receive less revenue initially when a loan is written, but it gives RateSetter a revenue stream into the future which reduces pressure to write new loans solely for business revenue, and also aligns our interests with those of investors, so that we are incentivised to write loans that repay.