Folk2Folk is now the UK’s largest peer-to-peer lending platform. Managing director Roy Warren talks to Marc Shoffman about turning 10, the future of P2P and why they stay loyal to their individual lenders…
A few years ago, Folk2Folk was a smaller player in the peer-to-peer lending sector, offering business loans in rural locations. It then changed to a nationwide strategy, which helped propel its strong growth in recent years.
The exits of the ‘big three’ brands of Zopa, Funding Circle and RateSetter, as well as Assetz Capital’s more recent departure from the retail space, has now launched Folk2Folk to the top of the P2P loan book ladder.
It is now the largest retail-focused P2P lender, with a cumulative loan book worth almost £600m.
Folk2Folk’s Roy Warren has become one of the longest serving P2P executives in this ever-changing sector, having joined as portfolio manager at the platform in 2015 before becoming managing director in 2019.
He explains why staying loyal to retail investors is key to the platform’s success.
Marc Shoffman (MS): How does it feel to be largest retail P2P lender?
Roy Warren (RW): I don’t concentrate on being number one. I always feel it is best to continuously improve our own business. It’s nice to know what other people are doing but our key focus is on being better than yesterday.
MS: What are you doing differently?
RW: From a company point of view, we pride ourselves in doing the right thing and have a great deal of loyalty to our investors. Last month we turned 10 years in existence, we have got to where we have today through our loyal high-net-worth investors, that’s where our loyalty lies.
That’s why we are not pulling out of the retail space. It is easy to throw it away and go to institutional funding. It would be an easy life, especially with increased regulation around retail and fear of further constraints. The retail space is easy to run away from but why should we deprive high-net-worth individuals of the choice? That’s the key thing.
MS: Why do you think other platforms have left?
RW: People have feared what the Financial Conduct Authority (FCA) will come up with, we have anticipated that for a long time.
Running into the arms of an institutional investor is a dangerous place to be in, as you are losing control of your business. We have had discussions about large institutional funding lines but they would end up running us.
We are open and encourage people to come forward, but it is getting the terms right.
MS: How has the sector changed during your time at Folk2Folk?
RW: The bank appetite has waned somewhat. We have gone through different peaks, 18 months ago we were seeing far better-quality credit driven towards us. Now we are getting into a space where banks are saying “go away” and we are getting loan applicants where we need to be careful not to take on someone else’s problem.
We are still taking a very heavy stick approach to our lending. Most of our assessment is manual and we don’t leave it to algorithms to say yes or no. Naturally we are cautious.
Our particular area of caution is property development, probably the worst scenario is to be in a partially completed development situation. Looking at previous downturns, that’s usually hit quite hard.
MS: What is investor and borrower sentiment like?
RW: Investors are changing their view on life a little bit. Our offering is interest-only for a five-year term. Because of the more volatile interest rate environment, people have got an appetite for shorter terms and higher rates.
If we have a 12-month loan for 8.5 per cent it will fly off quicky but seven per cent for five years would be hard to move on. There is appetite for short-duration loans. As soon as we come out with opportunities they get snapped up.
Our business model is pure pass-through from borrower to lender. We make our money from an upfront borrower fee of two per cent and an annual fee of 1.75 per cent to maintain the loan to the borrower.
There is still a healthy appetite for loans. We hear that we are still competitive.
MS: Do you have an IFISA target?
RW: We are hoping to attract as much as we can. We always make a bit of noise towards the end of the tax year.
MS: How do rising interest rates affect you?
RW: Whilst we traditionally haven’t been linked to base rate, now it’s coming to sharp focus, we have to follow the trend upwards as our competitors are doing that.
I don’t think the downturn will be as severe as first thought. Wholesale gas prices have come down and while we are not seeing the benefits yet, we hopefully will do.
People don’t allow us to be down for too long. It is businesses that drive the economy, many companies are in a position to invest and develop.
MS: How is the regulatory environment for P2P lenders?
RW: It is extremely challenging. I don’t think the FCA will go to the extreme view of saying no retail funds in P2P lending. We have gone through the recent consultation with the FCA so had a sense of what was coming, we have always as a business erred on the side of caution.
Changes in terms of financial promotion rules and the consumer duty haven’t been onerous. We have had to do some development to our technology.
The timing has worked as we have been working on a new loan management system and already had an online appropriateness test so just had to build it out further as there are additional requirements to make it harder and to make multiple versions. The important thing is doing the right thing, for borrowers and lenders.
MW: Is it still possible to make money from P2P lending?
RW: I think there are opportunities, if people have the appetite, and with the threat of increased regulation.
Being a regulated business isn’t cheap, there is quite a premium to get authorised and to operate, we are seeing continued consolidation and I’m sure it will continue.
This article was initially published by Peer2Peer Finance News on 10th March 2023 and can be viewed here.