Consumers have embarked on a long and often frustrating search for yield, finding limited opportunities to earn more than a pittance on deposits from financial institutions. Money has been flowing into stocks intermittently, but many people are also looking to diversify. It challenged people all over the world, not just in the United States.
A UK-based fintech offers savvy consumers an investment opportunity that earns between 8% and 12%, depending on the deal. This is achieved through a classic form of peer-to-peer lending via the fintech platform which simultaneously helps fill a gap in the financing of commercial real estate in the UK.
Blend Loan Network allows consumers to invest as little as 1,000 pounds (approximately $ 1,386) in one-time construction loans to medium and small developers. The company’s platform, launched in 2017, is both a matchmaker and a due diligence provider in the process of bringing higher returns to individual investors and expanding credit options to borrowers. The loans at the origin of the investments average around 18 months and have a maximum term of 24 months.
The program began as a response to a major ripple effect of the 2008-2009 financial crisis, according to Roxana Mohammadian-Molina, chief strategy officer. In the aftermath of the crisis, UK traditional banks gave up a large portion of their loans to developers, especially smaller ones.
As the situation continued, alternative lenders began to look into this industry, one of them being Blend Network. “On the one hand, there were real estate developers who did not have access to financing,” explains Mohammadian-Molina. “On the other hand, people with money in the bank received almost 0% interest on their deposits.” Peer-to-peer loans seemed like a way to meet the needs of both groups, she explains.
Large financial institutions continue to extend credit to large developers who build residential projects of more than 100 units, but small businesses have found it more difficult to obtain credit. They tend to build projects that fill in the gaps in small housing markets.
“There is a housing shortage,” says Mohammadian-Molina, which the company believes it can help address. Since the platform’s launch, it has made around 75 construction loans totaling around £ 28 million. The rate on loans averaged 10.06%.
Lend like a FinTech:
What Blend Network is doing is breaking down the traditional banking model of finance and lending and putting the pieces back together in a fintech way.
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How the investor and borrower matching platform works
Construction loans involve a degree of analysis and monitoring beyond many other forms of credit. The proceeds are generally not paid all at once. Instead, they are paid as the project progresses, and the developer’s use of the materials purchased with the loan is verified. Blended Network does not take any financial participation in the project, but provides the loan due diligence and ongoing monitoring that a traditional lender would provide. Once the internal team has verified a loan, it is prepared for the platform.
The company offers portals for potential borrowers and for potential investors, called “lenders”. Lenders can invest any amount in any transaction they want, as long as they hit the £ 1,000 threshold. Mohammadian-Molina says these investors tend to be doctors, lawyers, accountants and other professionals.
All investors have equal access to the documentation file for each loan, which is published 24 hours before a proposed loan goes live in the company’s investment system. Individuals registered with Blend Network can invest on a transaction-to-transaction basis or can enroll in the company’s Autolend program. In the latter case, the lender can specify the types of operations they want to invest in and the system will automatically search for these opportunities when new loans are listed.
Ready, ready, finished:
Offers typically sell out within minutes of posting, and opportunities are first come, first served. This is why the documentation is made available before the transaction can be invested.
As the concept turned out, the company added more professional staff to handle the due diligence and to build the size of the loan portfolio. So far, the company says there have been no bad debts.
Individual investor / lender management
The P2P model used by Blend Network is similar to how P2P originally worked on many platforms in the United States. Later, American platforms tended to look to institutional investors or even banks looking for investments, instead of individuals.
Each lender has a personal dashboard on the site that helps them track investments on the platform, including when interest payments are due and principal is due. The company uses emails to notify lenders of new developments on the dashboard and to let those who don’t use Autolend know about upcoming opportunities.
What to watch:
During the registration process, potential lenders must take a short online questionnaire to demonstrate a basic understanding of high risk investments.
If they do not answer all the questions correctly, they are guided to relevant reference material and can retake the quiz. Mohammadian-Molina notes that the company has taken this step voluntarily, to make sure investors understand that they are engaging in something riskier than a deposit. The UK regulator, the Financial Conduct Authority, is considering imposing such measures for all high-risk investments, according to FTAdivser.
The platform is available to investors from other countries, but all business is done in pounds sterling.
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Rely on a niche opportunity
The potential market for this type of credit is estimated to be between $ 25 billion and $ 30 billion in the UK, according to Mohammadian-Molina, so there should be plenty of opportunities without venturing into other types of credit. So far, relatively little marketing to potential lenders has been required, with interest in higher yielding opportunities leading to strong word of mouth promotion.
During the pandemic, Blend Network first experienced a drop in interest as people started to withdraw money. However, Mohammadian-Molina says conditions have stabilized enough for the demand for borrowing and lending to increase. This translated into a 104% increase in the loan portfolio in 2020.
A UK program called the Bank Referral Scheme is part of what helps bring additional business to the platform. The program, launched in 2016, requires the country’s nine largest banks to transfer small business loans they rejected to alternative lenders. (This is provided that the potential borrower has agreed to the information sharing.)
Mohammadian-Molina says the company has obtained several loans this way. The one that came from Barclays “was a great loan. The team of real estate developers had 60 years of experience between them and it was a good deal.