Nexx - social lending service

[rmbbrave]

A borrower or a lender be
Borrowers are about to get an alternative to the cap-in-hand visit to the bank manager. Rob Stock reports on the arrival of social lending.

Kiwi investors will soon be invited to follow in the footsteps of Britons and Americans lending money to perfect strangers over the internet.

Although that may sound like taking a risk with your hard-earned savings, young entrepreneurs Ben Milsom and Glenn Riddell are determined to convince investors here otherwise.

Early next year, the pair, both students at Auckland University, will launch Nexx, an online peer-to-peer social lending service which aims to bring lenders and borrowers together a sort of TradeMe for debt finance.

Social lending is all about breaking the stranglehold big organisations have on lending, and Milsom and Riddell say the track records of similar operations overseas, such as Prosper in the US and Zopa in Britain, give them heart that New Zealanders will embrace it.

Currently, investors wanting to lend their money out have little choice but to use a middleman such as a bank or finance company. But while banks and finance companies might be making loans at rates of 20% or more, they will be paying investors in their term investments and on-call accounts only 6-12%.

If those middlemen can be cut out, both investors and borrowers can get a fairer deal, Milsom and Riddell say.

Milsom says: "Personal finance is really, really expensive. Typical interest rates are between 17 and 25%, and that's before you add on top the finance company fees about 2-3% extra.

"That might not sound a lot, but for someone borrowing $5000 for 12 months at a typical rate of 22%, that's $117.31 per week, or 15% of the weekly income for someone on the average wage of $40,000.

"Things aren't much better for investors. They face a term deposit and debenture market full of fat, misrepresenting middlemen in the guise of finance companies. These companies issue debentures at rates averaging only 9.5%, barely above the risk-free bank term deposit rate of 8.6%. The return being paid to debenture holders in no way reflects the risk they are assuming.

"Our value proposition comes from removing the middle people and offering a better deal to both investors and borrowers."

By contrast to those fat lending fees and lender margins, Nexx plans to charge 0.5% of the loan amount from both borrower and lender.

Services such as Prosper and Zopa, and soon Nexx, work by allowing borrowers to post requests for funding and the reasons why they want it (along with photos). But before any request hits the screen, borrowers are screened, and those with criminal convictions, bankruptcies and the most awful credit records are blackballed.

Personal data such as borrowers' names and addresses are collected and checked, and a credit check is carried out, after which each borrower is assigned a credit grade of A, B, C, D, E or HR (higher risk).

These grades provide a guide to lenders as to what interest they should demand.

Lenders then make offers, but are encouraged to spread their money around. Someone with $5000 to lend might split it into $200 chunks and lend it to 25 borrowers. Loans can consist of dozens of small loans.

Some social lenders team up to spread their risk even further, giving their clubs names, and adopting social agendas. Clubs on Prosper include Pay Day Loan Terminators (enemies of pay day lenders), Rich Uncle (for loans to change your life) and For a Nurse (all nurses), and Nexx expects to see the same trend emerge here.

Investors' returns are taxed as income.

The track records of Prosper and Zopa show defaults on social lending are remarkably low, say the Nexx team, who have just completed a $100,000 first round of angel funding, and are about to embark on a second.

Milsom says the likes of Prosper and Zopa have very good payment histories, with losses of around 0.2% a year.

Social lending is no soft touch, though. Milsom says Nexx will look to periodically package up defaulted debt and sell it to collection companies.

There's no scope for lenders to take debt collecting into their own hands. Nexx will not share borrowers' details with them.

The pair are coy about how big their service can become, but with a personal finance market of $13.4 billion, there's scope for social lending to thrive. There are signs some lenders are already taking them seriously. One of the high street banks had been sniffing around, the pair say, though they won't name it.

Nexx is based in the Icehouse business incubator, having won $20,000 of seed funding and a nine-month residency after being named winner of the Spark $40K Challenge at the University of Auckland Business School.

HOW IT COULD WORK

A-grade credit rating: Applicant is an engineer with an MBA and excellent credit record looking to start a "Tropical Smoothie Franchise". He has raised $50,000 himself by extending his mortgage, but needs another $20,000. His monthly income is $4350. Monthly expenditure: $3740. He wants to borrow more cheaply than the 15% banks and finance companies might charge him. The likely bid range from Nexx lenders would be 10-13%. Lenders would get a rate around 0.5 to 3.5 percentage points higher than they'd get from a finance company debenture, or the 8% from a bank term deposit. B-grade rating: Applicants recently had their first child, and mother suffered unexpected medical problems which insurance did not cover. Father was laid-off from work (has since found another job). That led to them building up $12,000 of debt, which they now want to consolidate. Their monthly income is $2100. Monthly expenses are $1710. The likely bid range from Nexx lenders would be 13%-15%, but the couple would pay up to 20% to banks or finance companies. Source: Nexx

[rmbbrave]

U.S.A.
http://www.prosper.com/

England
http://www.zopa.com/ZopaWeb/

[Mick100]

I assume these guys are acting as brokers - not intermediaries
ie, the lender lends directly to the borrower and nexx collects a brokerage commission - good business for nexx - collect the brokerage without taking on any of the risk

Just been swatting up on adverse selction and moral hazard so I wouldn't be a starter to get involved in this sort of thing unless I was a borrower of course.
.

[zyreon]

i find it a fascinating concept, though i would probably prefer to use a more established provider who has a tried and tested means of 'syndicating' the loans, bidding etc and a decent credit scoring system, security registering and collections methods (as well as fraud prevention measures etc). but i guess if these guys can put together a strong enough concept and system it may be worth a look -. I heard about this concept a few months back, i think there will be an aussie one up by year end if not already.
Certainly a novel take on financial (dis)intermediation, and could be kinda neat managing your own loan book.

[rmbbrave]

i find it a fascinating concept, though i would probably prefer to use a more established provider who has a tried and tested means of 'syndicating' the loans, bidding etc and a decent credit scoring system, security registering and collections methods (as well as fraud prevention measures etc). but i guess if these guys can put together a strong enough concept and system it may be worth a look -. I heard about this concept a few months back, i think there will be an aussie one up by year end if not already.
Certainly a novel take on financial (dis)intermediation, and could be kinda neat managing your own loan book.

Yeah, I thought it'd be fun to have my own loan book too.

[zyreon]

Question is could you borrow enough money on there at a low enough rate to then on lend it and collect the net interest margin. why only perform the lending function if you can do the full intermediation...
On that matter, I wonder how much use these kind of things would get from finance companies and the like.

[rmbbrave]

Question is could you borrow enough money on there at a low enough rate to then on lend it and collect the net interest margin. why only perform the lending function if you can do the full intermediation...
On that matter, I wonder how much use these kind of things would get from finance companies and the like.

You probably could if you got yourself an A credit rating and lent the money out to lenders with a C credit rating.

I thought it would be a great way to educate your kids though.

- teach them the power of compound interest
- making judgements about peoples reasons for borrowing and peolpe per se.
- a bit of accounting as they run book.

Unlike shares where you have to buy parcels worth thousands, loans can be much smaller $50 to $100 per person.

[milsomb]

Hey Guys,

Great to see you're interested in some of the things we're doing at Nexx. I thought I would join in the discussion you're having above to see if I can answer any questions you might have on what we're doing and how it works - so if you're curious, fire away.

One of the things that caught my eye above is that you guys (Mick100, rmbbrave, zyreon) are talking about features of a loan marketplace that really appeal to you - return rates, the ability to make credit decisions yourself (run your own loan book), teach your kids about finance. One of the things that we've noticed about interest in p2p finance both here in New Zealand and internationally is that there is a huge variety of reasons people are drawn to the concept of a peer-to-peer financing system from an investment perspective - it might be as part of their overall investment strategy to leverage high returns, it might be community involvement, it might just be 'fun' and being able to evaluate and 'play the market' better than others to get good returns on funds invested.

I'd be keen to hear from others what bits of a p2p system like Nexx's appeal to them - we want this system to be something that appeals to lots of New Zealanders, so the more we can talk to people who might use the platform the better the system will be.

I'm available here on the forum, or you can email me at: ben at nexx dot co dot nz.

Ben Milsom
COO Nexx New Zealand Limited

[Radar]

Hey Guys,

Great to see you're interested in some of the things we're doing at Nexx. I thought I would join in the discussion you're having above to see if I can answer any questions you might have on what we're doing and how it works - so if you're curious, fire away.

One of the things that caught my eye above is that you guys (Mick100, rmbbrave, zyreon) are talking about features of a loan marketplace that really appeal to you - return rates, the ability to make credit decisions yourself (run your own loan book), teach your kids about finance. One of the things that we've noticed about interest in p2p finance both here in New Zealand and internationally is that there is a huge variety of reasons people are drawn to the concept of a peer-to-peer financing system from an investment perspective - it might be as part of their overall investment strategy to leverage high returns, it might be community involvement, it might just be 'fun' and being able to evaluate and 'play the market' better than others to get good returns on funds invested.

I'd be keen to hear from others what bits of a p2p system like Nexx's appeal to them - we want this system to be something that appeals to lots of New Zealanders, so the more we can talk to people who might use the platform the better the system will be.

I'm available here on the forum, or you can email me at: ben at nexx dot co dot nz.

Ben Milsom
COO Nexx New Zealand Limited

Love the concept, how about adding p2p for smaller startup's looking for equity partners?

What kind of people do you expect to use nexx for lending? those that can't get a loan from cash converters? or are you expecting businesses to jump in when banks have flatly refused?

What credit checking facilities are in place for lenders / what information will be available about borrowers?

Cheers

[lakedaemonian]

Hey Guys,

Great to see you're interested in some of the things we're doing at Nexx. I thought I would join in the discussion you're having above to see if I can answer any questions you might have on what we're doing and how it works - so if you're curious, fire away.

One of the things that caught my eye above is that you guys (Mick100, rmbbrave, zyreon) are talking about features of a loan marketplace that really appeal to you - return rates, the ability to make credit decisions yourself (run your own loan book), teach your kids about finance. One of the things that we've noticed about interest in p2p finance both here in New Zealand and internationally is that there is a huge variety of reasons people are drawn to the concept of a peer-to-peer financing system from an investment perspective - it might be as part of their overall investment strategy to leverage high returns, it might be community involvement, it might just be 'fun' and being able to evaluate and 'play the market' better than others to get good returns on funds invested.

I'd be keen to hear from others what bits of a p2p system like Nexx's appeal to them - we want this system to be something that appeals to lots of New Zealanders, so the more we can talk to people who might use the platform the better the system will be.

I'm available here on the forum, or you can email me at: ben at nexx dot co dot nz.

Ben Milsom
COO Nexx New Zealand Limited

Hi Ben,

It's great to see you taking such a personal interest in online discussions regarding your company.

Some questions I have are:

What "niche" does Nexx intend to fill?

P2P as with Posper.com?

B2P?

P2B?

B2B?

or all?!

How does Nexx intend to handle credit scoring of borrowers?

It's my opinion that credit scoring is quite simplistic in NZ compared to peer systems in the
US for example....I'm aware of some finance players(like mtf and GE) with reasonably robust and accurate credit scoring models here....but relying on Baycorp/Veda may be insufficient in my opinion and poses a serious challenge to your business unless you've found an effective solution.


Until Nexx develops it's own proprietary credit scoring will it not be a bit of a crapshoot?


Does Nexx intend to nurture/develop large lenders along the lines of Ebay/trademe store sellers?

Does Nexx intend to operate any "roadshows" along the lines of what Ebay did/does to professionalize it's seller base?

I would think roadshow training for potential lenders in the 6 major population sellers could generate some quick sense of community.

I can see how Nexx could generate positive PR when the ineviable case of malignant loansharking makes it into mass media, but could also potenially be hurt by legislation intended to regulate loan sharks.

Does Nexx intend to place loan caps in place( $ and %) as part of a comprehensive plan to reduce money laundering/fraud opportunity?

Will Nexx include the following functions/feaures:

message boards

references/endorsements by other members(by veteran borrowers/lenders only)

lending groups

How will Nexx monetize traffic/transactions?

credit checks, PPSA fees?

Borrow AND lending side fees?

Late fees?

Secondary market?

Long term I could even see Nexx cards competing with the likes of GE money cards.

Huge potential. It must be a very exciting time for you and your team

Last question....how does one invest in Nexx now? no joke!