New lender to tackle banks

Neil Roberts, the founder of Harmoney, the country’s first peer-to-peer lender.
Neil Roberts, the founder of Harmoney, the country’s first peer-to-peer lender.

Neil Roberts is a hunter after extreme value.

He is about to press the go button on Harmoney, the country's first peer-to-peer lender, challenging the banks for a slice of the "prime" personal loan market.

Peer-to-peer lending, or P2P as it has become known, is an internet-age business , with P2P services facilitating loans from investors to borrowers directly, cutting out banks.

P2P promises lower borrowing rates for those seeking personal loans and higher-than-bank returns for lenders, who can also keep their capital risk down by spreading their investment over many, many loans.

New Zealand lags Australia, the UK and most of Europe in P2P, so the launch of Harmoney is a milestone.

"From a career perspective, this has probably been the most challenging and rewarding thing I have done to date," says Roberts, who set up Pacific Retail Finance (PRF) for Noel Leeming Group.

"It has certainly had its moments when things have got pretty tough and you think, ‘I can't see a clear way of solving that issue, and is that issue going to prevent us going on at all?"'

There has been a personal price for him and his team, some of whom have now been together for 14 years, and many of whom were involved in the PRF launch in 2001.

"In these projects, it doesn't matter what environment you are in, you dedicate your life to them," he says. "It does take over a little bit for a time. You are trying to create extreme value, otherwise what's the point of bothering at all?

"If you are trying to create extreme value over anyone else in the marketplace for your customers and your shareholders, and anybody else who works in the business, then you have to be looking for that value, and be seen to be the person that's going to give up your own personal time to execute it."

By his count Roberts and his team have helped create "extreme value" three times already. The first was at lender AGC, which GE Money ended up buying.

"I joined AGC to turn around their insurance business, which I did very quickly. It took me about six weeks," he recalls.

That was fun, but then he hatched a plan which he was frustrated to find the AGC board rejected.

"I saw there was high, high demand for personal loans, and people putting up with very low service, and that there wasn't a huge amount of sensitivity around the pricing of it."

His plan was to build a direct-to-consumer loans business enabled by technology, which would process loan applications in minutes, not days. It was inspired by his early career in insurance in the UK during a period of massive change, when the old, adviser-led model of selling insurance was being replaced by direct-to-the public sales.

"I had seen first-hand how you could revolutionise an industry using technology and automation to cut out costs and deliver a better service," Roberts says. "Being a good corporate citizen, I worked up a plan, and put it to AGC.

"They basically said, ‘Yeah, we understand. We can see where you are going, but it's too much risk, and we don't like change."'

Noel Leeming Group saw the potential, and PRF was born.

"We could give a yes or a no to people within about seven minutes," Roberts says.

The loans industry's standard turnaround time was much longer, more like a week or so, Roberts recalls.

PRF had applications in the next five years of $3 billion, wrote $1.6b of loans, and generated $100 million profit before tax, before GE swooped again. That counts as extreme value creation No 2.

No 3 was a stint he spent in Sydney when involved with an Australian business called Flexi-Rent, which he helped build up and float on the ASX. It's now worth more than A$1.1b.

Roberts says he's always been driven. Raised by a single mother in Wales, money was tight in his childhood, but it wasn't a life of privation. Roberts, who has not the slightest hint of a Welsh accent, says he was fascinated by business from a young age.

"I have a love for business, I really do," he says. "Fifteen-year-old me was fascinated by business. He was like a sponge. I really did believe, and I didn't come from affluence at all, that for me hard work was a ticket out of not being well-off."

Ironically, for a seller of debt, he has been personally debt-averse, saying he attacked his own mortgage with gusto.

"I probably took it to extremes, before buying furniture, before buying a car," he says.

But it's the challenge that motivates him now, not the money.

"I'm in my 40s now. I have a son on the way, I really want to do something that is worthwhile," he says, adding he doesn't mean to imply what he had done before wasn't. "But we have the time and the opportunity here to create something special, and give a lot of value back."

The plan originally was to use technology to build a better debt collector, but as he "champion challenged" that idea, he came back to P2P, which he had watched grow around the world.

"We saw the embryonic signs of almost an en masse consumer movement . . . There was a definite heartbeat there that was very strong."

And there was enthusiasm wherever and whenever he discussed the idea with others.

"When the penny drops with people, they go ‘What a fantastic idea. It makes sense'."

The great attraction of P2P is that it cuts the bank, or finance company, out of the loop.

The P2P platform merely facilitates loans, and does it at lower cost. Harmoney's "bank-grade" system is designed to allow people to "fractionalise" their investments into $25 chunks which can each be put into a different loan, building a portfolio of exposure to different borrowers.

Harmoney identity-checks and fraud-checks potential borrowers and gives them one of 35 "loss ratings" which determines how much they pay in interest on their loan. Investors choose the level of risk they want to take on, and how they spread their money around.

"Lenders must understand that they are taking the risk," Roberts says. "We believe that the risk is entirely manageable."

And the return?

"We are very comfortable with suggesting that if somebody put their money across the platform, their average return will be 12 per cent."

That 12 per cent projected return is hard to fit into the traditional risk-reward spectrum. 12 per cent was the kind of return the very riskiest finance companies offered in the boom in the early-to-mid 2000s before they collapsed.

"As an investor, on average I might get 16 or 18 per cent back after Harmoney's been paid," he said. "There will be some losses within that, though."

It will be bank-grade lending though - actually, Roberts claims it will be better-then bank-grade.

"We are targeting with laser-like focus a prime group of customers. We are not targeting people who can't get credit elsewhere. We are not looking for people with a bad credit history."

Its credit model has been back-tested, and was robust. Because it is "prime" lending, the ups and downs of sharemarkets, and dips and rises in the economy, barely showed up on the back-projected default rate of borrowers.

Harmoney charges investors 1.25 per cent of payments they get back.

"The reason we did it that way is it shows absolute alignment," Roberts says. "The platform does not get paid a bean until you get a payment back.

"If you do the maths on that . . . it equates to 0.6 per cent of funds under management, which we think is more than reasonable."

And, it won't just be mum and dad investors. A fund for sophisticated investors called Harmoney Platinum is about to launch. In time, Roberts predicts, super fund managers will become big investors, including KiwiSaver managers.

Prime personal lending is a big market.

"For debt consolidation there's $5b-$6b," says Roberts. "But Kiwis take out another $4b a year in lending through their credit cards, through stores, through buying cars, or bank personal loans in our target demographic.

"Staggering, isn't it? There's more than enough market there."

Depending on how they are rated, borrowers will pay between 9.99 per cent and 39 per cent for their loans, with an application fee of 2 per cent to 6 per cent, again, depending on their rating. The main volume is in the middle.

Roberts is confident many will find cheaper borrowing at Harmoney. And once borrowers have shown themselves good payers, they'll earn lower rates of interest.

There's no plan for large marketing campaigns.

"I'm hopeful that people will find it in their own time. But what I am rock solid on is this is going to be a wonderful thing for people, and that people will get more time in shorts, eventually."

It's early days, though an exit plan will be needed for shareholders. Roberts has been involved in two business sales, so that's possible.

Roberts likes to tell the tale of his meeting with a bank chief executive at a function where the bank chief executive got a hard time from another guest about how P2P was a threat to his business.

"It irritated him a little bit," said Roberts, "And the thing that he said was, ‘We are going to sit and watch and see how this thing transpires. If it is successful, we will buy it, and if it's not, we don't need to worry about it anyway.' Something along those lines anyway."

But there could just as easily be a sharemarket listing as at FlexiGroup. Roberts prefers to talk about the main mission though - making ordinary people richer.

"It means their money will be working so much harder for them in this little country that just does not have great options when it comes to low-risk, fixed-term debt investments."


Globally P2P is becoming big business. Harmoney is New Zealand's first P2P lender targeting prime personal lending. Overseas, there is also P2P serving small business borrowers, something Harmoney will one day emulate.

In the UK, website Crowdfund Insider wrote: "According to the data compiled by P2P Finance Association, members, lenders have lent over £500 million in the first half of 2014, carving a path to lend over £ 1 billion for the year – an important milestone for the young industry."

Charles Moldow, of US company Foundation Capital, a minor investor in Harmoney: "We believe that when . . . lending activity is taken off the books of big banks, there will be much less need for government to backstop those banks – thereby rendering irrelevant the concept of ‘too big to fail'." Cormac Leech from London-based Liberum Capital: "P2P is the Walmart, or Ryanair, of financial intermediation."

"Peer-to-peer lending is not risk-free, and carries relatively more risk than traditional savings accounts, but is less risky than investing in stocks and shares." British P2P lender Zopa. British business secretary Vince Cable has high hopes for P2P for small and medium businesses. Speaking in February he said: "Too much business lending is concentrated in the big banks and, if we're to have a properly functioning business lending market, they need to be challenged by new banks, peer-to-peer lenders and other alternative providers." 

Sunday Star Times