How to read P2P platform data



Platform transparency has been a key priority for peer-to-peer lending platforms, but do retail investors know what they are actually looking for? Kathryn Gaw breaks it down…

Data and transparency have become key principles of peer-to-peer lending, and a priority of the Financial Conduct Authority (FCA). Platforms are required to be completely transparent when it comes to publishing past performance statistics, default rates and wind down plans.

Meanwhile, retail investors are forever being urged to perform their own due diligence on a platform before investing any money. But what does this due diligence actually look like when it comes to judging the data and transparency of a P2P lender?

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“Transparency strongly correlates with lending performance and inversely correlates with many forms of platform or fraud risk (which includes, among other things, the likelihood that the platform is negligent, fraudulent, incompetent or ill-prepared for a wind down),” explains Neil Faulkner, managing director of P2P ratings and research firm 4th Way.

“Merely finding that a platform provides lots of information is the easiest filter that investors can use to build a strong shortlist of potential lending accounts.

“Investors from home can do a great deal in assessing transparency without any special tools, and those methods will usually be sufficient, as it correlates very well with lending performance.”

Here are a few easy ways for retail investors to check the quality of a platform’s data and its commitment to transparency…

Check the platform’s real world credentials

Before investing in any platform for the first time, do a couple of quick searches to find out more about its fundamentals. All P2P platforms in the UK are regulated by the FCA, either directly or as an appointed representative of a directly-authorised firm.

Perform a quick search of the FCA’s website to see if your chosen platform is actually regulated, or if it has been subject to any enforcement action in the past. You can also check Companies House to find out key information such as when the company was founded, who the directors are, and how the company has been performing financially over the past few years.

Browse past lending data

Every P2P platform is required to publish a full book of all historical loans showing the characteristics of the loans and their status. These can usually be found on a dedicated ‘statistics’ webpage, or under the ‘About Us’ section of the website. Look at the consistency of the returns over time, and the average default rate of the platform’s loans.

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You should also check the platform’s history of investor losses. Some platforms have managed to maintain a track record of zero investor losses since inception by taking a more conservative approach to risk, while others may target slightly higher returns with a slightly higher risk of default.

Understand the difference between loans in recovery and loans in default

The number one risk for P2P lenders is that the borrower defaults on the loan and is unable to repay the capital and/or interest. When a loan is in recovery, it means that the platform is in the process of trying to recover the money owed, but there is a good chance that the funds in recovery could turn into defaults.

According to the FCA, a loan is in default if it has not been paid within 180 days of the payment date. However, some P2P platforms impose stricter conditions than the regulator, placing a loan in default within 30 days of a missed payment, or less. The platform should be extremely transparent about its definition of a default, and what action it intends to take if a borrower misses a payment.

Check the FAQ section of the platform’s website for more information on their approach to collections and recoveries. Some P2P lenders will also publish statistics on past recovery actions, which may give you a sense of the likelihood of a recovery becoming a default.

Target rates vs actual rates

Every P2P investor is attracted by the prospect of earning a higher return, but be aware of the difference between target rates and actual rates. Target rates are estimated by the platform and will represent the most optimistic outcome for the investor.

Target rates may not take defaults into account, and they may refer to the higher-risk loan products only. Actual annualised returns will give you a better idea of what you could earn in real terms. While past performance is no indication of future success, it can be useful to match the platform’s target returns against the actual annualised returns for the previous few years.

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For example, the platform may be targeting 15 per cent returns, but past returns could be closer to 10 per cent. Understanding the difference between actual and target returns can help you to manage your expectations and make better lending decisions.

Be aware of red flags

A lack of clear and easy to read data is probably the biggest red flag of all. Each platform should be able to explain the risks (and rewards) of their products clearly and accurately, with more detailed information available if required.

The company website should contain plenty of public information on the key people and their prior experience in lending. There should also be a full and clear description of the platform’s credit-checking process, and the steps it takes to assess loans and to go after bad debts.

Each individual loan should come with a lot of detail on the borrower and the project being funded, and regular updates should be communicated to investors regarding any delays or potential recovery action.

Finally, you should be able to contact your platform with ease. If it is not easy to find a phone number or email address for the firm, this may suggest a poor customer experience, which could result in frustration for investors.

Use third party sources

One of the trickiest things about conducting due diligence on a platform is the absence of standard metrics of data across the P2P industry. For instance, some platforms report calendar year data, while others report their data for the April-to-April financial year. This can make it hard to compare like-for-like statistics across multiple platforms.

However, there are a few third-party sources which you can turn to for better clarity. Of course, Peer2Peer Finance News reports on all industry data and platform updates, while 4th Way offers detailed platform analyses and sector-wide ratings.

Read moreHow to do your due diligence on a P2P platform

Innovate Finance’s 36H Group publishes loanbook data for all of its member companies. And many retail investors find it useful to join public forums such as the P2P Independent Forum, where they can discuss platform data and performance with other retail investors.