Funding Secure enters administration: what’s the future for P2P lending?

I read this in the news today that Funding Secure has gone into administration. This is a very high profile collapse and it will leave “savers” with large losses and it’s a stain on the P2P industry.!

It’s a company that I never invested any money with but was tempted at one point. Looking back now, the name however sounds like an oxymoron, like Northern Rock.

I have a long history of investing in P2P (over a decade actually) and overall, it’s been an alright investment but once you factor in the time spent, it’s a badly paid hobby. I’ve done well from some P2P investing at times and terrible at others. The risk profile of lending money is very different than that of other investing. Even Woodford’s investors will get most of their money back – with P2P you can lose everything!

Image result for funding secure

One reason I didn’t invest in Funding Secure was because they seemed to be doing something similar to other outfits but were offering higher rates. That was a red flag for me. Lending to people who’ll accept a high rate of interest must mean that these people were desperate for the cash. “Ho, ho, ho, I’ll be rich” thinks the naïve investor who thinks that a 15% return will turn £10,000 into £50,000 in around 10 years but a 5% return will take over 30 years. But with investing, return of capital is more important than return on capital.

Naive investors didn’t consider that the flip side of +15% returns was -100% loss. Or maybe they considered that bad things only happen to other people and that they are cavalier in their approach to risk, thinking “It won’t happen to me!”

The P2P market was very saturated with new outfits – all chasing the same number of borrowers and in my experience they were chasing an order book (sales) and didn’t really care about repayments (returns). Risks were mis-priced and investors/savers have been burnt!

P2P lending needs to come with a massive label saying:

“Danger! This product is hazardous for your Wealth”

just like cigarettes are and junk food should be. Some people really think that they are 100% safe and secure and that they are saving their money here. Be under no illusion, no matter how big the contingency fund is, if you give people your money, you may not get it all back. That makes you either an investor or gambler and not a saver.

I’m still invested in in P2P but I’ve scaled back in everything except in Abundance Investment. I would talk up the investment class (although, just by not calling them junk bonds is being overly kind) and I could even put in a few affiliate links with the hope that one of you will click on it. But what’s the point – if you know about P2P lending, you probably already do it. It’s not right for everyone and I wouldn’t feel right if I pushed anyone into a scheme that loses them money.

P2P investing is turning to be just like a lot of modernity – over-hyped and a bit shit really. Think Deliveroo (like a takeaway but you use your phone), WeWork (like and office but….) or AirBnB (like renting out your flat but you use your phone), or PurpleBricks (like and estate agent but now online). The business of lending to other people has been around for years. It’s risky and after costs, the returns are not great – sure, lending money beats working for a living but there are other things to do with your time and money.

Fintech has a part to play in our financial futures and at some point the Friends Reuniteds and FundingSecures of this world will die off and the concepts themselves are strong and a few well funding and designed companies will remain – doing more or less what we’ve always done. In the meantime, there will be a few winners and many losers along the way.

Finally, the other reason I didn’t put money into Funding Secure was because I didn’t have the time to learn how to use a new platform and if you factor in the value of your own time into your returns, P2P is rubbish as an investment – hobby it can be fun but if you really like passive investing, ETFs are the way to go.

Thanks, GFF

10 Comments

  1. One would imagine this won’t be the last to go under?
    Never heard return of capital Vs return on capital – nice! Seems like the key takeaway is a true understanding of the relationship between risk and return!

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  2. This certainly won’t be the last P2P company to go under – is/was Funding Secure bigger than Lendy?
    Fortunately I wasn’t with either but I was with Funding Knight, which went under a few years back. For my own reasons (portfolio simplifaction and not being able to convert existing loans into ISAs), I’ve been exiting out of P2P these last couple of years. I’ve had decent returns (around 6-7% over the years, even with Funding Circle’s defaults) but you’re right, it’s all very time intensive (I didn’t trust the auto-invest).

    Liked by 1 person

    1. Funding Knight – crusading against the banks and fighting for lenders? Last seen making a retreat from Battle of Hattin?
      I had my worst experience with ThinCats – the name means they don’t like Fat Cats but I’m left feeling like the cat that didn’t get the cream.

      Liked by 1 person

  3. I’m preferring high yield bond funds as a source of 6%+ yields. These may be invested in “junk” bonds but the risk is spread over many individual bonds.

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    1. yes – don’t lose all your money in one go. 🙂
      Bonds vs. shares won’t be solved today but
      coincidentally, I bought 8 shares in SSE in June by accident and they have a dividend of 8.5% on what I paid. I received a fiver dividend in September and the shares are up about 25% on what I paid for them – and this for a boring utility company.
      With that yield, many people were thinking that they were junk too?

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  4. I’ve been considering getting involved in P2P lending, it’s so true what you say about Return-OF-Capital being more important than Return-ON-Capital

    Liked by 2 people

    1. I wouldn’t say don’t do it – and some of the sign-up bonuses are nice but it’s a bit like getting a dog – it’s for life not just for the bonus.
      I’ve not put a penny into some platforms and I’ll still taking money out every month after 7 years!

      Liked by 2 people

      1. If you don’t mind me asking, what would you see as average returns in the P2P world? and how are you assessing a platform for risk? Balance sheet? Risk level?

        Thanks for your time!

        Tyler

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      2. I don’t know what average returns are. My returns are running at around 7.2% but that’s a sandbagged rate – there’s a chance that bad debts come good.
        I only invest new money into Abundance now but may consider Ratesetter if I had too much money to know what to do with.

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