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Plenti (previously called RateSetter) is a peer-to-peer lending platform. They will IPO sometime in the near future and if you are already a Plenti customer then you would have already received an IPO  prospectus.

This blog post does not intend to analyse Plenti’s IPO and/or value the IPO at all. This blog post is  purely an anecdotal experience of dealing with Plenti as a lender.

 Let me first delve into the definition of peer-2-peer lending. Simplest form of peer-2-peer lending is when you lend some amount of money to a peer, for example a mate or a relative. You lend purely based on trust/relationship/friendship and with the promise that they will repay the borrowed amount. So, in this simplest form, you (lender) place your trust on the peer (borrower) to repay their debts to you (lender). The next level is, having an intermediary between you (lender) and peer(borrower) where you (lender) place your trust on the intermediary to make sure that the peer (borrower) will repay their debts to you (lender). For this to happen, the intermediary needs place their trust on the peer (borrower) to repay their debts and the intermediary needs to uphold their own behaviour so that you (lender) can continue placing your trust on them.

Plenti acts as that intermediary. You (lender) place your trust on Plenti that they would make sure the peer (borrower) will repay their debts to you (lender). In order for enabling this channel Plenti takes a cut from either side of the deal.

Lender and borrower both have to open accounts with the intermediary. Intermediary needs to earn the trust of the lender and a borrower needs to prove that they are trustworthy to the intermediary. This is done via identity checks, credit checks etc. Once approved, both lender and borrower are now able to participate in peer-2-peer lending market.

A lender places an order , for example “$1000 @ 5% per annum for 5 years offer” (sell order), with the intermediary. A borrower places an order, for example “want $1000 for 5 years, will pay 5% per annum bid” (buy order), with the intermediary.   The intermediary will match the sell-order book and buy-order book and execute the transaction. Borrower gets the money, pays  back interest+principal over time to the lender.

So, that’s peer-2-peer lending 101.

Now, let’s explore another dimension i.e. motivation.

In the simplest form of peer-2-peer lending, lender is lending money directly to borrower, who is most likely a friend or a relative, with an intent of helping out and not with an interest motive. That is, lender’s motivation most likely is driven by need to help rather than want to earn interest. However, that is not the case with peer-2-peer lending market. In a peer-2-peer lending market,  lender (who places a sell order) wants to earn interest for the principal being lent, also expects the principal to be repaid in full. From lender’s perspective there is a profit motive, plain and simple.

Now, coming back to the original reason as to why I started writing this post, that is to regale my experience as a lender on Plenti’s peer-2-peer platform.  I opened an account with Plenti, back then it was called RateSetter, as a lender. I think, I had $10,000 to lend. I cannot remember the exact interest rates but long term was higher than short term.  Using made up average  interest rates, 3 month was at 3.5%, 6 month was at 3.75%, 12 months was at 4.75%, 24 months was at 4.9%.  I could have placed my lend order at whatever interest rate/term I wanted. I wanted to transact quickly so I had a look at borrow-side order book, the top most order there was for “$10000 for 12 months @ 4.75%”. Spread between lend and borrow was around 20bps, I did not care, I placed a lend order crossing the spread and took out the borrow order.

On examining the transaction, it appeared that two different borrow orders took out my lend order. One transaction for $400 and another transaction for $9600. Looked again at the borrow order book, order “$10000 for 12 months @ 4.75%” was still there.

First red flag. Do whales/iceberg orders exist on borrow-side in peer-2-peer lending platform? Technically or atleast in my view they should not. In peer-2-peer lending, borrower is supposed to be retail and in need of money. Retail borrowers cannot be whales/icebergs? Or Can they?

Within 24hrs, borrower who had borrowed $9,600 had repaid in full along with an interest of $1.1 which minus Plenti’s commission was $1.

Second red flag. Why would a borrower place an order for a 12-month term and repay within 24 hrs?

Three days later, the borrower who had borrowed $400 had repaid in full along with interest.

I was a bit disappointed. I took out a borrow order that clearly stated “12 month” term. My 12 month $10,000 lend @4.75% had made the full circle back to me within four days.

It appeared that even if you lend for a specific term, 12 months in my case, there is no penalty on the borrower for repaying in full way before end of term. In my case $9,600 came back in 24hrs! If a normal lender lends money, there are extra charges in place if the borrower decides to repay the debt in full before end of term. Apparently, Plenti does not have any such feature to support lenders.

If there is no penalty in place for repaying the debt in full before the end of term then there is an opportunity for arbitrage.

As the long term is higher interest compared to short term, there is a high probability that most lend orders will be for longer term. My assumption is based around the fact that the lender has a profit motive i.e. maximising interest. Therefore, there is a high probability that the lend based on term is quite lob-sided on lend order-book compared to borrow order-book. Is Plenti managing these skews in the order books by playing market-maker? Considering there is no penalty for early repayment in full, have they used a chunk of my lend i.e. $9,600 to pad a deficit somewhere else? Recycle longer term lend orders amongst themselves, take a clip (commission), carry some on your own books for a while, rinse and repeat?  If it is, then it is not peer-2-peer lending, it is more like an investment bank. This thought made me uncomfortable and did not sit well with me.

Fifth day, I drained the funds out of RateSetter. Recently, I received the IPO prospectus, it may or may not stonk but as a peer-2-peer lending platform Plenti may not be for me.

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