The now-defunct Quakle was always on the social side of the peer-to-peer (P2P) loans spectrum. The site encouraged lenders to get to know their borrowers online. “Quakle believes that social bonds strengthen confidence and make borrowers more likely to repay,” boasted the site upon its launch.
This social feel is what attracted many of Quakle’s users, drawn in by the personal touch and the opportunity to throw others a helping hand. But, unfortunately for many of these lenders, several borrowers did not stick to their promises. And with Quakle now dead and buried, they have little chance of retrieving their cash.
So where did it all go wrong? And what lessons can P2P users - and indeed the industry itself - glean from the first death in this new lending sector?
A slow death
The warning signs had been there for a while. All new business was halted by Quakle several months and according to some sources the site had not written a loan since January. Even when the company was trading it still only accounted for 0.1% of all P2P loans. In contrast, Zopa loans now make up around 2% of all unsecured lending in the UK.
As we reported earlier this month, a key reason for the site's failure is believed to be the shoddy quality of borrower credit checks. This was certainly a key problem for one lovemoney.com reader, Graham Pateman, who is currently waiting for around 70% of his initial £1,120 investment on the site to be repaid.
“For the first three to four months I was reasonably confident and Quakle remained bullish that they were on the backs of non-payers,” said Mr Pateman. “However this was clearly not the case as I am, to this day, unaware of any prosecutions or agreements made with non-payers.”
It also seems likely that Quakle’s poor credit assessment policy allowed many high risk borrowers to take advantage of a new credit avenue.
Payday loans
The high default rates across Quakle loans suggest that many of the site’s debtors were not in a healthy financial state. A look at the common reasons for requesting loans confirms this.
Out of 20 separate loans made by one Quakle lender who passed their loan book to lovemoney.com, seven requests for cash related to getting out of payday loan debt. A further three requests refer to the consolidation of existing debts, while one is titled “help me break the cycle”.
The loan book also reveals a somewhat muddled and redundant credit grading system. One loan titled “payday loan nightmare!!!” has an interest rate of 25% - the steepest rate possible - but has nonetheless received a B credit grade from Quakle; the second best rating. Several other loans graded one step worse by the site (C) receive lower interest rates - 19.00% for one loan and 19.75% on another.
“Someone with a Quakle A rated risk who was still 'happy' to borrow money at a 25% interest rate should have set alarm bells ringing for users,” says Steve Cunningham, a former lender on the site.
Another Quakle user, lovemoney.com reader Julia H, also said that of all the reasons for requesting money, payday loans were the main one. “I totally disagree with payday loans,” she says, “I just wanted to help someone who was unfortunate in the past. I wanted to give them a chance to start afresh.”
But it is this emotional and social desire to help – rather than a reliance on rigid and numeric credit checks – that left many lenders out of pocket and appears to have ultimately led to Quakle’s demise.
P2P or social lending?
In allowing its users to decide on the worthiness of prospective borrowers, Quakle set out on a drastically different path to the P2P big fishes Zopa, Funding Circle and RateSetter who all credit check users fully.
The largest P2P site, Zopa rates all borrowers from A* to C (or young). Lenders then decide what risk of user their money goes to. This cuts out the chance of sympathetic users being taken in by bogus sob stories. For Giles Anderson, CEO of Zopa and Chairman of the P2P Finance Association, the “emotional cause” as put forward by some Quakle borrowers can “distort the marketplace for some lenders”.
Alex Gowar, Marketing Director of RateSetter takes a similar view: “Whether the borrower likes the look of the lender or not shouldn’t be important; it should be that their money is secure."
RateSetter operates along arguably the most different model to Quakle, as all users are kept anonymous. The lender has no idea who has their money, and vice versa. All that matters is that both parties are happy with the interest rate. The default risk to the lender is eliminated by the use of a back-up provision fund (funded by borrowers) that is used to compensate any failed repayments.
“There is a difference between P2P lending and social lending,” explained RateSetter’s Mr Gowar. “We don’t see ourselves as a social lending company”.
Of the P2P ‘big three’, Funding Circle arguably has the most social of lending policies. However, money is lent out to businesses, as opposed to individuals. Again all businesses are credit checked, but the lender can also ask questions of the company asking for the loan and inspect its accounts.
Regulation
The death of Quakle certainly has the potential to knock the image of the growing P2P market. Yet the sheer differences between the doomed site and the market leaders are clear to see.
On a very basic level Zopa, Funding Circle and RateSetter are all members of the newly formed P2P Finance Association. This body was formed back in August to maintain high minimum standards for consumers in the sector and provide a coherent central body for the new industry.
To join the association strict operating principles had to be adhered to. These included rules on capital requirements, complaints handling, credit assessments and anti-fraud measures.
The group did ask Quakle to join, but the site declined. And in light of recent events, perhaps we all now know why.
Quakle have not responded to our requests for comment on this story.
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