Ratesetter Proposed Changes to Fees

Page 11: Section 2.2 of the Explanatory Memo - Changes to interest margin fee

Anyone with Ratesetter have thoughts on the fee changes? Feels like a bad deal for members as it gives RS the ability to take a larger cut without needing to do any more work

My thoughts from Whirlpool thread:

If I'm understanding correctly, under the new proposal they're separating the way Ratesetter's fee is collected. At the moment Ratesetter takes 10% of the interest you earn as their fee. Using their example of a 6% interest rate for borrowers, members would currently receive 5.4% and Ratesetter would receive 0.6% as their fee. Under the New Interest Margin Fee, 6% borrower interest rate could be split as 5% going to members and 1% going to Ratesetter. In essence, members would receive less under the New Interest Margin Fee.

While they've stated that during implementation, they won't affect the status quo (ie: same return as current Interest Margin Fee), it does allow Ratesetter in future to move the interest split significantly to take a larger cut of the return – up to 3%. At this extreme, using 6% interest rate for borrowers, 3% would go to members and 3% as Ratesetter's fees. As lenders we lend at 3% interest, while borrowers would see 6% interest rate on their loan.

and

…It's the longer term that I'm concerned about – under the New Margin Interest Fee we could be getting 'relatively' less.

As interest rates go up and banks lift their rates, RS will naturally increase their borrower rates. If a borrower is willing to pay 12% interest, would you still be happy receiving 9% (and RS taking 3%) when you could be receiving 10.8% (and RS taking 1.2%)? I would feel like I've missed out on 1.8%!

IMO RS are looking to futureproof a way to increase their profits at the expense of members.

Edit: added my thoughts for context

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Comments

  •  

    Can you elaborate what the new fee structure is?

  •  

    Hi randomnninja,

    Thanks for posting this here.

    I think one important thing to point out is that under the proposed new interest margin fee, the way that we calculate and show rates on the RateSetter website and in your RateSetter account does not change. That is, the rate you see (and specify in a lending order) is net of the interest margin fee.

    So, assuming lender order rates remain the same, the rate you would get after fees under the new fee structure would be the same. The amount of gross interest (i.e. before fees) payable by the borrower might change, but this wouldn't result in you receiving less interest.

    This change is in part being made because a number of potential lenders have told us that they find the idea of 10% of interest confusing (some think that it means 10% p.a!) whereas a fee of, for example, 1%p.a of principal is easier to understand and more similar to how fees are expressed for other types of investments. Additionally, the current fee structure means that interest margin fees have a greater impact on borrowers for longer term loans, whereas arguably this should not be the case.

    The proposed Early Access Transfer feature is something that many of our lenders have asked for, and we're excited to make available. We think that being able to facilitate lenders to get early access to their funds in the event of a change in their personal or financial circumstances is important and will help RateSetter become an even more attractive investment option for existing and new investors.

    Hope that helps give some further background to the proposed changes. If you've got any further queries, happy to answer if I can.

    Kind regards,

    Ben Milsom

    • +2 votes

      I agree that whatever is offered in the lender platform is what you'll receive and that does make it easier to understand. However your new fee structure puts downward pressure on what will be offered to lenders.

      A rate offered to a borrower of $10,000 is 9% and let's assume that this rate is as high as you can go to remain competitive.

      Current structure (10% of interest): Per annum, lender receives $900 in interest (9%) less RS fee of $90 (10% of interest) = Net lender benefit $810

      New structure (1% of principal): Per annum, lender receives $800 in interest (8%), RS receives $100 (1% of principal) = Net lender benefit $800
      New structure (3% of principal): Per annum, lender receives $600 in interest (6%), RS receives $300 (3% of principal) = Net lender benefit $600

      Is my understanding correct?

    • +1 vote

      Early Access Transfer feature

      Well, if people asked for it, I'm not so sure they're keen for the 3.5-5% fee.

      What happens if someone is lending out at 9% and the market rate is 8% and they want to sell out of that loan? They give up the higher interest rate (which goes to someone else), then they also have a pay a fee on top of that?

  •  

    Hi RandomNinja,

    As lender rates are set net of fees, we don't necessarily think this will change the rate at which lenders are prepared to lend in each lending market.

    Lenders 'compete' based on net lending order rate. So, in your example above, its better to look at it from a lender order perspective.

    Say a lender wanted a net return of 8% p.a. Under the current interest margin fee model, the rate the borrower pays will be ~8.8%. In the new model (set at say, 1% of outstanding loan principal p.a) the borrower would pay 9%. The net rate shown to and offered by lenders would remain the same in both cases - 8% p.a. We think that the fact the borrower rate may change will not necessarily impact what rate lenders are prepared to offer compared to other orders in a lending market.

    Kind regards

    Ben

    • +1 vote

      Agree, lenders will still make lending decisions based on what is offered to them. I'm concerned that what will be offered to them will not be as beneficial under the new structure.

      Let's say the rate offered to a borrower of $10,000 rises to 10% and this is competitive in the market.

      Current structure (10% of interest): Per annum, lender receives $1000 in interest (10%) less RS fee of $100 (10% of interest) = Net lender benefit $900

      Under the new structure, you are not obligated to offer lenders the current rate of 10%. You could in theory continue to offer 8% to lenders and increase your principal to 2%
      New structure (2% of principal): Per annum, lender receives $800 in interest (8%), RS receives $200 (2% of principal) = Net lender benefit $800

      Why would members vote for this when it potentially exposes them to lower returns?

      •  

        HI RandomNinja,

        Assuming no defaults and the protection of the Provision Fund, no lender would receive a net rate of return lower than they had requested.

        Under your example above, RateSetter doesn't 'offer 8%' to lenders. That rate is set by the lending orders in our lending markets.

        So, your examples above aren't directly comparable. In your 'current' example, lenders are offering to lend (remember, a net figure) at 9%. That's the rate they enter and the rate they see. In your 'new' example, they're offering to lend at 8%. That's why the return is different. Lenders don't set lending orders relative to a fixed borrower rate. They set them relative to other net lending market orders.

        Hope that helps.

        • +1 vote

          Surely the borrower rate does affect lending orders when looking at the bigger picture.

          Let me rephrase my new example - assuming a competitive borrower rate of 10%, if you increase your fee to 2% under the New Interest Margin Fee structure, a lender offering to lend at higher than 8% would not get loans matched as the borrower could find a better deal elsewhere.

          While lenders won't receive less than the return they requested, they are also no longer able to request as high a return under the New fee structure.

    •  

      @milsomb The borrowers aren't going to offer to pay a higher rate to fully cover Ratesetter's larger cut.
      I'm pretty sure that the increased middleman fees will result in borrowers covering half the increased fee by paying a bit more and lenders covering the other half by receiving a bit less. That will reduce the attractiveness of the scheme for lenders and borrowers and therefore reduce liquidity in the market.

      I don't think this is a good move on the part of Ratesetter. I was planning on increasing my lending investments substantially but won't do that now.

  • +1 vote

    Rate-setter is providing a service and charging a fee. If you think the service is worth the fee, you can choose to use Rate-setter.

    If you think the service isn't worth the fee, you're free to not use Rate-setter.

    • +2 votes

      Agree 100% and that will remain true whichever way this washes out.

      Thing is, Ratesetter members are being asked to vote on whether to accept or reject this new fee structure. After the back and forth with Ben, I'm not seeing anything but potential downside for members.

      If your bank gave you a say in whether or not they should increase their fees, I imagine your first choice wouldn't be to accept it and consider your alternatives! ;)

      • -1 vote

        While I get that this can potentially be not as good (as distinct from bad) for members,

        If a borrower is willing to pay 12% interest, would you still be happy receiving 9% (and RS taking 3%) when you could be receiving 10.8% (and RS taking 1.2%)? I would feel like I've missed out on 1.8%!

        This is actually how short-term brokerage normally works. Lenders set a rate they want to receive, and the broker (in this case Rate-Setter) goes out and gets as high a rate as they can. The difference between the lender's required rate and the borrower's rate goes to the broker, and depends on how good the broker is.

        Under the current system, arguably the lender gets more returns "without needing to do any more work" to use your words, because all the work is being done by Rate-Setter. The lender is still only loaning the same amount.

        The new way does let RS get paid more, but it also provides them more incentive to work for higher rates from borrowers, and that's important if they're looking to incentivise their staff or expand. Loan brokering takes more work than managing a fund, for example, where a percentage fee structure is more standard.

        To put it simply, RS is being greedy because they want to be paid more (but they will have to work for it), and you're also being greedy (you want higher than lending rates if they're available), but you're not putting in work for it. Shrugs.


        I'm not really advocating for either side - I'm neither a member nor a (short-term) loan broker (haha, you would have to pay me a lot more to go into that line of work, and I can already charge fairly obscene fees if I wanted to get into that line of work). This is just how I understand the market to work.

        •  

          …you're also being greedy (you want higher than lending rates if they're available), but you're not putting in work for it

          Haha, you're not wrong there and that's a large part of the allure of RS! Getting less for the same amount of work is always a hard pill to swallow.

          …RS get paid more, but it also provides them more incentive to work for higher rates from borrowers, and that's important if they're looking to incentivise their staff or expand.

          If RS's intent is to use the additional fees to grow the business, it hasn't been explained. It's hard to know whether higher fees would be reinvested for members' benefit or dropped through to their profit line. And under the new scheme, it would be at the discretion of RS.

          Could you explain a bit more around 'incentive to work for higher rates from borrowers' in the context of RS? If their fee is a fixed % of principal, I would have thought the borrower rate less relevant compared to having more $ out on loan.

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