Masters of profiling risks: How HarMoney hit the ground running with $100 million in the pocket to jumpstart its peer-to-peer lending platform

How does a business which doesn’t have a precedent in New Zealand get $100 million of investments lined up to bankroll the product so quickly?

Ask CEO and founder of HarMoney, Neil Roberts, and he will tell you it is all about having intimate knowledge about credit. He thinks the people behind HarMoney knows credit very well.

HarMoney is New Zealand’s first peer-to-peer lender (P2P, meaning it is a financial platform that bypasses the banks. Going onto HarMoney’s website, you can offer yourself as an investor (being a supplier of credit) or you could borrow money off someone (user of credit), to buy a car or pay for a holiday.

In its relatively short existence, HarMoney has broken a few records. It chalked up over $2 million of loans within three weeks of it being in business and lined up $100 million from three funds and one bank, enabling it to drawdown funds, to run the business.

HarMoney has also managed to attract equity investment from Heartland Bank, which took a 10% stake in the company and is one of the providers of the $100 million pooled.

According to Roberts, the $2 million of credit chalked up is a global record, way more than what the world’s leading P2P lender in America, the Lending Club, did when it started off. 

Getting in front of your peers

Having identified raising capital as one of the most difficult for P2P lenders, Robert’s team had a good hunch of what they needed to do, to generate some buzz around the company real quick. They needed to get in front of the world P2P crowd to create some impact, and they did, according to Robert.

What worked well was putting Andrew Cathie, HarMoney’s chief data scientist, in front of a crowd filled with P2P industry leaders, funders, investors.

Cathie presented his views at the LendIt 2014 on how the P2P world can lend across borders -- something not done at the moment -- using an apple-to-apple comparison, to identify factors that make up the scorecard for risks assessment.

Off the stage, HarMoney sussed out the people it would like to approach through the company’s network.

“The key to it was, when we walked in, we were the experts on credit. We generated a lot of interest. We must have talked and pitched to between 40 and 50 people – some were running family offices, some were hedge funds, others were (traditional) banks, investment banks,” Roberts says.

Power board, networks

The networking and results paid off. HarMoney got hooked up with a contact called Brian Barefoot, an ex-Paine & Webber banker who has served on the advisory board of the Lending Club, the largest P2P lender in the US.

Through Barefoot, HarMoney got hooked up with another savvy financial investor Etienne Boillot, a former CEO of Yves St Laurent, US, whose company Shepherd Capital (Luxembourg based), is active in the lending markets in the US, UK, France, Spain and Italy among others. Etienne eventually put a bit of investment into HarMoney’s equity.

Barefoot and Boillot  now serve on HarMoney’s advisory board, together with two others – Charles Moldow,  a seasoned investor who was an early investor in the Lending Club which has loaned out US$5 billion, and currently partner at Foundation Capital; and Scott Bommer, founder of a hedge fund, who was also an early investor in the Lending Club. 

For a local and digital perspective, Roberts taps the views of local advisory board member James Punnet who was one of the founders of LifeDirect, since bought by TradeMe.

Mastering risk profiling

Roberts is certain HarMoney has got a risk profiling system which is highly robust, enabling it to achieve 60% success rate in identifying loan defaults.

Using live data from an independent party, in this case BayCorp – a credit bureau – and the expertise of data scientist Dr Andrew Bracewell, HarMoney tested its system against data from BayCorp.

“We ran the test to see how good our system would be, in picking up defaults. We got a 60% score,” he says, adding that is about as close you can get in predicting future defaults.

Roberts and his team are envisioning a future where HarMoney’s platform cuts across borders, tapping investments from low interest rate countries such as Japan, trapped continuously in a deflationary cycle, and offering loans to economies where SMEs can access to more than four oligarchic banks, for their loan choices.

Robert says there are compelling reasons for HarMoney to continue challenging the status quo.

“We like to think we have a mission to surprise and delight. We want to be multi-asset capable, multi-currency capable. It maybe, in some country, we are only on one side of it (the market). In Japan, for instance, we may be only raising money.”

He is passionate about SMEs, and thinks HarMoney can help in freeing up the credit marketplace.

Robert and his core team have worked together for over 12 years and have created some winning projects, including setting up Pacific Retail Finance, in 2001, which had over $3 billion in applications, writing $1.5 billion in lending.

First to market

Being the first to market, HarMoney had a few hurdles to cross before going live. Six months into the Financial Markets Authority’s regulations (April 2014) being out on P2P lending, the company had to guess pretty successfully what the key issues would be, and how to mitigate those.

The best thing it did was to lobby for the inclusion of institutional investors for P2P. Roberts says: “We had to lobby government very hard, against the view that you can’t take on institutional money. It has been our view and subsequently, the collective view, that institutional money is good, from both the borrower’s and lender’s perspective, to form part of the investment pool.”

The core of P2P lending is quite similar to crowdfunding. In crowd funding, investors find a project they like to invest in. In P2P, investors find a loan they would like to finance.

On HarMoney’s platform, the minimum investment is $500. The maximum amount a borrower can ask for is $35,000. Borrowers can use their loans for debt consolidation, car loans, home improvements, or for holiday. There are criteria on both sides of the equation – displayed on HarMoney’s website. The net investment returns are pegged at between 9.5% and 24% depending on the quality of the investment.

Roberts says the key to HarMoney’s loan portfolio platform is, fractionalisation – breaking up loans into $25-chunks, which the spreads the risks of say, a $4000 loan over 160 chunks.

At the end of the day, HarMoney hopes to track what the bank’s track record are. “The stated losses of banks on the grid, at in the 3.5-4% range, we hope to track that. We are after bank grade customers, we can’t do business with people who are struggling.”