Trailblazer Q&A – Mozzeno, P2P lending and the pandemic
By Katerina Mansour - 19 November 2020
Peer-to-peer or P2P lending as we know it today began back in 2004 with Zopa, the first official P2P lender. The 2008 financial crisis then caused the practice of lending to peers to become more widespread. Indeed, the crash tarnished banks’ reputations, providing an opportunity for consumer-driven projects to emerge.
P2P lending platforms have shaken up the market by creating a fast and convenient alternative to bank loans. An alternative which often offers lower rates, more flexibility and reduced risk. Both lenders and borrowers are able to reap considerable benefits from this new kind of financing. Borrowers can access small loans at lower rates while lenders can receive higher returns on their investments.
The UK is among the top markets for peer-to-peer lending. In 2018, the lending volume in the UK was over £6 billion, a 20% growth from 2017. But, P2P players have emerged all throughout Europe. Growing acceptance of online finance, along with a (typically) supportive regulatory environment, bolstered the growth of P2P. Research shows the European P2P lending market could be worth $7.1 billion by 2023, nearly double its value in 2017.
How will P2P lending fare against the Covid-19 pandemic?
With all the benefits it presents, P2P lending still faced significant challenges with the outbreak of Covid-19. The pandemic arguably represented a first big hurdle for a market that made its name through one of the world’s biggest financial recessions. When the sanitary crisis escalated in early 2020, many P2P lending platforms experienced growing demand to liquidate investments and withdraw cash. For instance, Funding Circle reported first-half operating losses of £113m, more than three times its losses a year ago.
Yet, despite some considerable setbacks, the P2P market seems to be weathering the storm. In France, P2P lending volumes in H1 2020 increased by 32% compared to the same period in 2019. Furthermore, P2P has been a key recourse for SMEs in need of funding to get through the pandemic, especially in Asia.
Even so, it’s hard to predict what the market will be like by the end of the pandemic. Many lenders could indeed take this as an opportunity to diversify their offer and strengthen their products. But, they may also suffer from decreased loan demand and reticent investors, if economic uncertainty persists.
Q&A with Mozzeno
Having received a strong Early Metrics rating, we thought the founders of Mozzeno could offer some interesting insights into the future of P2P. So we asked Frédéric Dujeux and Xavier Laoureux to share their outlook on the overall market, the impact of Covid-19, as well as their next steps as entrepreneurs.
Mozzeno offers a collaborative financing platform that allows individuals to indirectly finance loans. These investors can grant funding to other individuals or businesses. Individuals request a personal loan through the platform, which prompts the startup to analyse their solvability and repayment abilities. This analysis is largely based on public data from Belgium’s national bank (Centrale des credits aux particuliers).
Thanks to its algorithms, the platform determines a score for the requester, which represents their credit risk. Mozzeno then provides the requester with various options to fund the requested loan, through the startup’s subscribed investors. Lastly, the startup handles making the funds available to the requester and distributing paid interest to the investors who participated.
How would you characterise the Belgian lending landscape? And what place does Mozzeno hold in this ecosystem?
Frédéric Dujeux: The Belgian market is mainly shared between banks (60%) and non-bank lenders (40%). Mozzeno is uniquely positioned on the market, as a lender providing collaborative loans. We are granting the loans on our own balance sheet, and then refinancing through the issuance of notes. Through this process, investors from the community will earn interest from the loans, indirectly. The process is fully digital (literally no paper and fully remote) which is unique on the market. Also, our “positive money” philosophy differentiates us from other players: we only provide simple to understand instalment loans and no credit lines or credit cards which are more dangerous in terms of debt. We pay a reward in case of perfect repayment over the course of the loan.
How does the technology behind Mozzeno work, particularly the scoring algorithms?
Frédéric Dujeux: More than 50% of our staff is technology and data science oriented. We have developed our own scoring technology, improving every day. The technology is based on several models/algorithms, some of which are aiming to better predict people’s potential, rather than focusing on their former credit history.
Xavier Laoureux: Also, as a regulated company, we have access to the national bank’s positive/negative credit databases. This, together with the collaboration of a market-leading credit insurer, has helped us save time in the learning phase of our model. We were able to train our models efficiently without the need to experience several default scenarios with our customers. This was a considerable advantage in terms of training time and costs.
What has been the biggest challenge in Mozzeno’s journey so far?
Xavier Laoureux: There were several challenges but the main one was most likely obtaining the initial agreement from the regulator. There had been numerous unsuccessful attempts to launch a peer-to-peer lending platform prior to ours, as such a direct model is simply forbidden by current Belgian regulations.
How has the pandemic affected your activities on the lender side? And on the investor side?
Frédéric Dujeux: On the lending side, in April a severe reduction in loan demand and stricter acceptance rules contributed to a reduction in loan volumes. These volumes grew again from June to October which was our best month ever (€1.6M loan volume). The impact of the new rules to fight the second wave of the pandemic still need to be assessed.
The on the investor side, initially, there was an abrupt stop to the deposits. There were more withdrawals but they were clearly controlled. We could reassure investors about the support and reliability (top rating) of our credit insurer (>95% of loans are insured at 100% of the outstanding). This protection is clearly stronger than an originator buyback guarantee in some other markets, because the counterparty covering the default risk is a real credit insurer (with obligations from regulators in terms of equity, etc) and not a standard commercial company.
The last few months have been brutal for some big P2P lenders – with RateSetter’s debacle, Funding Circle recording a tripling of losses and LendingClub fully exiting the p2p space… What do you think this means for the future of the P2P sector?
Xavier Laoureux: There is a generation of platforms which have considerably invested in growth, and growth has been impressive indeed. But they focused on process automation and structural cost control too late. Of course, they initially had to create the demand, more than today where the sharing economy and alternative financing is more mainstream. Regarding the increased losses faced by some platforms, it’s good to remember that Zopa, for instance, was created even earlier and faced a crisis as well, with reduced impact on returns and losses. So here again the impact seen depends on the strategy and protection mechanisms in place.
Frédéric Dujeux: We are convinced smaller but more agile platforms can find a faster way to profitability with controlled funding resources. I think there will also be more collaborations between different parties helping each other to extract more value from a shared acquisition effort (neo/mobile banks, p2p lenders, retailers, eCommerce, etc.).
You recently raised €3 million, how are you planning to use these funds?
Xavier Laoureux: We plan on developing our brand awareness and amount of marketing campaigns required to further develop lending volumes and reach 3% market share in Belgium. We are also launching a loan product for SMEs, similar to our highly automated lending process for consumer loans.
Any other exciting news or developments coming up?
Frédéric Dujeux: Having launched usage of PSD2 recently, the potential is huge from automation and scoring perspectives. We are currently working on an opportunity for investors to sell part of an investments (Notes) back to Mozzeno under some conditions (unique for Belgian investors in alternative finance assets). We are developing a Lending as a Service B2B2C offer enabling financial and non-financial players to provide credit facilities to their consumers, in addition to “buy now pay later” payment products for the eCommerce and retail sector.
Early Metrics is excited to see Mozzeno continue to expand in this ecosystem. We hope this inspires lenders to continue to support small businesses and entrepreneurs in times of uncertainty. P2P can be a win-win model, with the potential to foster economic growth on a small and large scale.