In the second part of an interview with pension-fund owned lender Fiduciam, SRP asked Johan Groothaert and Henrik Takkenberg (pictured), two former structured products executives, about the similarities of the lending and the structured products markets, and the importance of technology to grow a market that has become a disruptive force in the financial services sector.

Are your structuring skills transferable to the P2P lending segment of the market?
HT: It is a different set of structuring skills but we definitely see the value of our structured products background in relation to organisational, legal, front-to-back IT infrastructure, and other elements that are driving our activity at Fiduciam. When you have worked, lived and breathe structured products for 20 years you can see how the market has evolved. It all started with a term sheet written by yourself and then it moved to a secondary market set up, how do you make information available to the end investor and how do you display the information, all the way to full automation of some of the processes. There are now millions of products in some markets and the levels of automation have increased many-fold. We are trying to apply all that experience to our work at Fiduciam and transfer that knowledge to the loan market which at this stage is still using the paper (sheet man) to operate.

Do you see any similarities between the structured products and the P2P lending market?
JG: When we look at marketplace lending today we see a lot of similarities. There is an opportunity in the market because banks are retreating from lending to corporates, in particular SMEs and entrepreneurs.  At the same time technology has made major leaps which enables parties such as Fiduciam to install challenger bank systems at an acceptable cost and within a reasonable time frame. These fintech platforms offer an enormous benefit over the legacy platforms of mainstream banks, often cutting the loan origination cost by 80%. This new technology, combined with the void left due to Basel III, creates an exciting opportunity which comes with the same frontier spirit as we had in structured products 20 years ago. The skills we are deploying at Fiduciam is our knowledge of complex finance and technology; marketplace lending is just another implementation. Fiduciam in a way is just replicating what we did when we launched the first ETF platform, introduced structured certificates, created the first outperformance indices... which is opening news markets and pushing frontiers.

How important is technology to grow the P2P lending market?
JG: When we began our careers in the structured products market the equity culture was being established in Europe. I still remember how we had to explain to investors how an equity index functioned. Equity indices had only just been established in some markets. To do some back-tests we had to get index values/levels of a then brand-new German equity index called the DAX faxed over. As the equity culture was beginning to take off, almost simultaneously there was a technology revolution which permitted the derivatives market to emerge, and this opened up opportunities to create products that were unfeasible previously. That was the starting point and since then the market has evolved to where we are today. Investors in Europe did not want to invest directly in equities because of the market risk and that's how capital protected products came about. After that, investors began to feel more comfortable about risk but wanted lower fees so the market came up with exchange-traded funds (ETFs), and other access products. So the emergence of the structured products industry was borne out of a combination of new opportunities (equity culture) with a change in environment (technology).

In February, HJCO Capital Partners (HJCO), a Dutch investment firm for active and alternative investments, announced plans to launch a product linked to peer-to-peer (P2P) lending in the Netherlands. Do you see products linked to loan activity getting traction in the market?
JG: If you are making 10% per annum on a secured loan to an SME with a reasonable conservative loan-to-value, there is not much point in looking at structured products. And at the same time the impact of your investment is much more visible: helping entrepreneurs to create jobs and wealth. The appeal of this market segment is that SMEs find it difficult to access credit and that underwriting secured loans is an extensive process. Whilst banks are focused on dealing with new regulation, legacy issues, restructuring, reducing balance sheets and cost cutting, they do not have the time or appetite to develop such platforms, leaving the void for new entrants such as Fiduciam.

Is flexibility an edge to capture market share in this segment?
HT: We have a very flexible set up and can increase our server/data capacity by ten-fold with the click of a mouse, but banks would need six months to do the same. This puts us in a very good position to enter the market and reactivate it. Banks have very robust platforms and processes but no flexibility, and that is something that you need in any market to be competitive and react quickly to new opportunities.

What are the firm's plans for the short term?
JG: We have successfully operated our 'proof of concept' business model for a year now, and currently we are in the midst of our platform roll-out with the aim of scaling up our capacity gradually as we tap into new SME segments. We have completed 50% of this process and we aim to have a fully-fledged set-up within the next few months. We want to grow our loan book ten-fold by the end of next year."

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