Peter Behrens is RateSetter’s COO and Head of Credit and Risk.
Most people’s first question about peer to peer lending is “What happens when someone doesn’t pay back?!”
Managing risk at RateSetter is much like managing a football team: the Provision Fund is the showy striker, but it’s actually the stoic defenders – the Credit Approvals team – that do the hard yards ensuring that the Provision Fund can look impressive by doing as little as possible.
I thought it may be of interest for Lenders to understand how a Borrower is approved, and the kind of person that makes it through to borrow on RateSetter.
Borrowers usually come direct to the site, or from one of the many price comparison sites we work with, such as MoneySuperMarket or CompareTheMarket. In July this year, we introduced a screen called SmartQuote that has substantially improved our ability to quickly and efficiently profile our incoming Borrowers. In a matter of seconds, we credit score and profile the Borrower based on the information from one of the two credit bureaux we use. This automatically declines a proportion of incoming Borrowers who don’t fit our criteria. Those who qualify are given a personalised APR based on their circumstances.
They then fill in a secondary form that gives us a lot of the detail to make a decision – this is information about the Borrower and his circumstances: where he or she works, their household income and their monthly outgoings. Every application is manually assessed by the credit team, and we complete further credit checks, and often speak to the Borrower personally. I can’t divulge the precise criteria we use, but only about 10-12% of applicants meet the strict lending approach that we have. The whole process takes about a day to complete, which allows us to match Borrowers with Lenders quickly and efficiently. As well as being cheaper than a bank, it’s also important that we give them a more efficient and respectful service than they would get from a lot of traditional lenders.
We look to lend based on three key criteria – affordability, affordability and affordability. Everything we do is designed to ensure that Borrowers don’t over-extend themselves in what they can afford to pay back. Someone on £20,000 wishing to borrow 10% of her salary will almost certainly be a better Borrower than someone earning £100,000, but with lots of debt and wanting to borrow 25% of their salary.
The expectation of many people who don’t know RateSetter is that people are borrowing to get themselves out of debt problems, but in reality those people are very unlikely to qualify through our credit process. The typical Borrower is in his thirties, in a stable job earning £30-35k, owns his own property and is borrowing to buy a new car. They are people who have carefully managed credit over a period of years, and are aware of their obligations and indeed the penalties for mismanaging credit.
So far this approach has served us well, though we are in a never-ending process of subtly updating and improving our criteria. We’re fully aware though that over time the level of bad debt will rise – that’s when the Provision Fund can step in and claim the glory. But as all football managers know, it’s the unseen hard work that pays dividends.