Digging into MarketInvoice’s Loanbook
By Sam Griffiths on 28th July 2015
As part of its ongoing commitment to transparency, MarketInvoice has today published its loanbook on the AltFi Data website. The loanbook will be updated on a monthly basis in a similar fashion to those of RateSetter and Zopa. You can find it here. Also Madelyn Puente, Head of Investor Development at MarketInvoice has written a blog post on the value of transparency, illuminating the reasons why MarketInvoice have made this commitment to transparency. You can read her article here.
We’ve been lucky enough to have a sneak preview of the loanbook and have put together a few highlights to help those readers who have better things to do than play with data all day!
One of the most exciting things about MarketInvoice’s loanbook is the number of transactions that it has completed and the size of this number compared to the total transactions carried out. This is due to the average term of its invoice trades being just under 42 days (seeFigure 4.), significantly shorter than non invoice finance lending platforms. Figure 1. below shows the number of loans originated and completed successfully for the UK’s top four platforms.
Figure 1 – Number of loans successfully completed by the top four platforms.
MarketInvoice has almost 4 times the number of completed transactions as Funding Circle. Indeed, we believe that MarketInvoice has the biggest number of successfully completed P2P business loans in the UK (and probably the world). There is a huge amount that can be learnt from the loanbook without the need for assumptions and any modeling of the future.
Most platforms are on the 2nd, 3rd or even 4th iteration of their credit model. Lending practices also evolve – for example Funding Circle’s introduction of a new risk band, RateSetter’s move into business lending and Zopa’s move to a more diverse borrower mix. It is hard to model these changes accurately to predict the future. For a platform that makes 3 year loans, 2 years may pass before the effectiveness of the credit process is fully understood. For MarketInvoice, the validation, or otherwise, of its credit decision takes a little under 42 days on average to materialise!
Figure 2. Invoices Traded and Advance amounts.
The loanbook enables us to observe not just the volume of invoices traded through MarketInvoice but also the amount lent against those invoices (the Advance Amount). We can see from Figure 2. that the average advance rate has remained fairly constant at around 80% recently, having come down from 85% in MarketInvoice’s first few years of operation. All things being equal, a lower advance rate is less risky for investors.
The amount of investor money deployed through MarketInvoice’s platform at any one time is surprisingly low at just under £28m when compared to MarketInvoice’s cumulative volume. Funding Circle currently has over half a billion pounds of principal outstanding. However, when one considers that MarketInvoice recycles investor’s capital around 8 times a year, this disparity in principal outstanding makes more sense.
Figure 3. Mean and median loan size for the UK’s four biggest platforms.
Figure 3 shows the mean loan size for MarketInvoice to be just over £51,000. The median, however, in a similar way to that of RateSetter, is much smaller. This difference indicates that the distribution of loan size is much larger for MarketInvoice than for Funding Circle or Zopa.
Figure 4. Distribution of loan term. Orange markers indicate monthly volume weighted mean.
The average loan term since the platform launched is just under 42 days, but as can be seen from figure 4, the term has increased over recent months, moving closer to 50 days. The length of some of the outlying trades is surprising with the shortest term being 1 day and the longest recorded as 382 days!
Figure 5. Distribution of gross loan yield. Orange markers indicate monthly volume weighted mean.
The gross yield for investors has trended downwards overtime. In the early days investors could expect 20+% on average but now 10% seems to be the norm as can be seen in figure 5. This could be a result of strong investor demand putting pressure on yields as the model matures and is better understood. But we are also told that MarketInvoice is now financing a broader spectrum of invoices including some that are much lower risk, large corporate-to-large corporate invoices. It is worth bearing in mind that investments with MarketInvoice are secured against the invoice.
Figure 6. Crystallised losses and Delinquent loans by origination quarter
Gross yield is only half the story when considering an investor return. What about loss rates? Figure 6 shows crystallised losses and delinquent (>45 days late) loans as a percentage of origination by quarter. Note that there are several quarters with no losses at all. The crystallised loss rate life to date is 0.11% and there is currently 2.87% of oustanding loans that MarketInvoice terms as being "In arrears", or delinquent. Due to the secured nature of MarketInvoice's product, historically the vast majority (95%+) of delinquencies have successful outcomes and do not go on to become crystallised losses. Pretty impressive.
However, there are two other things to factor in before getting to the net yield:
- MarketInvoice's fees, on a percentage basis, are higher than most platforms (between 20 and 30% of investor profit), this is because of the high number of short duration trades, which each carry a fixed processing cost despite MarketInvoice’s heavily automated process.
- Cash Drag. Again due to the short term nature of each trade, investors’ cash can, on a percentage basis, remain uninvested for a longer amount of time than on a platform where money is invested in, say 3 year loans. This means the overall gross interest rate on all money deposited with MarketInvoice is lower. We cannot get a feel for the magnitude of this effect from the loanbook but we are told that on average between 75% and 85% of money deposited on the platform is deployed at any one time.
The above yield analysis is a somewhat qualitative analysis backed by numbers. For a more thorough analysis, we are very pleased to say thatMarketInvoice’s introduction into the Liberum AltFi Returns Index is imminent.