CEO Kim Muhota explains that Pertuity Direct operates “at the intersection of traditional banking, social networking and capital markets.” In an interview with Transcapitalist last Thursday, the Pertuity Direct team sought to make the case for why their model enables them to go after the mass market and eliminate the frictions that exist in the p2p market.
First a few basics about the PD model:
- The current sole loan product is a three year installment loan. The average interest rate is around 13%.
- The minimum FICO score is 660. PD is very selective in the borrowers that they approve.
- Borrowers retain full privacy. No credit information is made public. Pertuity Direct handles all of the underwriting and approvals, then sells the loans to NRF.
- Loans are either funded in their entirety or rejected. Within 3 days you will have full certainty over whether your loan will be approved.
- Borrower closing fees total 1-2%
- Focused exclusively on the prime to super-prime sector of the marketplace. Borrowers have an average FICO score of 740.
- Lenders participate through the National Retail Fund, a mutual fund registered with the SEC. There is no auctioning of interest rates or browsing profiles to choose who to fund.
- The fund is valued daily. The penalty fee for early withdrawals is a fixed 2%, but it only applies for the first 12 months. After that, the full investment amount can be withdrawn for free. Earnings can be redeemed on a quarterly basis.
- There is no net worth requirement to invest. The minimum investment is $250.
- Lender fees total 1.63%
From these facts, a simple question arises: what makes Pertuity Direct a social lending platform? Without interest rate auctions, borrower profiles, or direct borrower-lender relationships, it seems that the defining p2p market characteristics are missing. Lisa Lough, SVP of Marketing explains that the community aspect is still present. Borrowers can choose to make their story public in the community section if they wish and lenders can participate in the Pertuity Bucks program to help pay down the principal of borrowers whose stories they find to be particularly compelling.
Still, Mr. Muhota explains that their model is significantly different from the competitors. Studies indicate that one reason people have not been interested in p2p is because it seemed alien to them; lenders often do not have the expertise to make credit decisions and borrowers are faced with too much uncertainty over whether their loans will be funded and at what rate. Consequently, the PD opinion is that auction-based, labor-intensive approach is not the way of the future for social lending. For the broader population, the competitive set is traditional banking and investment products and PD seeks to offer an alternative to those.
As social lending evolves, PD believes that they are well positioned to step into a “huge gap in the marketplace.” Their model is equally well suited to those borrowers and investors who love the community aspect of p2p lending as to borrowers who would rather remain anonymous and lenders who are simply looking to invest in a strong asset class.
First, they have sought to make the account opening process “as simple as possible.” Indeed, as I described in my experience opening an account with them, a lender can have an account running within 5 minutes. They also seek to “aggressively manage risk” so that lenders don’t have to. From a borrower perspective, they highly value privacy, an important element of reaching the prime marketplace. Prime borrowers with a variety of opportunities are going to walk away from a deal where they have to make their personal credit information public. By protecting the privacy of their borrowers, PD avoids the adverse selection problem confronted by the p2p players.
By integrating these best practices of traditional banks but offering a different loan product, PD seeks to take the banks and credit card companies head on. Mr. Muhota made clear that PD is not just striving to be the main social lender, but rather sees the traditional banking and credit establishment as competitors, because “until you look broadly to the market, you remain a niche player.” Consumers are looking to put their money to work in a safe asset class and PD can provide that service. Unlike the Lending Club platform (the only other social lender registered with the SEC) where each dollar lent needs to be assigned by the lender to a given borrower, which can be a time-consuming process and totally unwieldy if you are working with several thousands of dollars, the PD model allows lenders to deploy their capital efficiently and at any sum to a diversified pool.
Social lending has clearly evolved from the model of browsing individual stories and choosing to fund borrowers one-by-one. Pertuity Direct offers an intuitive and mainstream approach to social lending that makes it attractive to the broad market and may well be the best model for the emerging industry as it moves forward.