Dozens: Overall Update + Community Changes

I would strongly recommend you think twice about P2P lending.

P2P lending is indeed beneficial for the borrowers, but the same can’t be said about the lenders. P2P lending often looks like savings account, smells like savings account and feels like savings account, but they are NOT savings accounts. Many savers will undoubtedly unknowingly expose themselves to risks that they don’t understand and cannot afford to take.

The two major risks are geographical/geopolitical risk and credit risk.

  • The geographical/geopolitical risk is the simplest to understand, because most P2P lending platforms operate in only one specific geographical region, they don’t and can’t have a geographically diversified portfolio of borrowers. As a result of that, lenders are exposed to uncompensated geographical and geopolitical risk.

  • The credit risk is slight more complex that that. In today’s financial world, most high quality borrowers (established & profitable business with good credit rating) would prefer either issuing their own bonds or borrowing from banks who usually offers them a more favourable interest rate than P2P lending platforms. Even subprime borrowers often get a quotation from banks and then compare that to the P2P lending offer. The dominating reason for someone to borrow via the P2P lending route instead of banks is usually a cheaper rate. Banks aren’t ignorant nor stupid, they charge a higher interest for good reasons (profitability is one of them, but that isn’t everything). Therefore, if a borrower ends up choosing P2P, it’s usually because the P2P platform has underestimated their risk of late payments and default. This exposes P2P lenders to under-compensated credit risk.

I highlighted the uncompensated geographical and geopolitical risk and under-compensated credit risk, because they are unique to P2P lenders.

  • Banks don’t suffer from uncompensated geographical and geopolitical risk. Even if a bank only operates in one geographical region, they can still use swaps and other financial instruments to manage the risk exposure to the geographical region.

  • Banks very rarely suffer from under-compensated credit risk, because by lending to a business, they are putting their own money at risk. Therefore they are more motivated (and have more resources) to perform accurate, detailed and rigid credit assessment than P2P lenders who depends on the P2P lending platform which doesn’t have their own money at risk to perform the assessments.

Considering the above risks, I can hardly agree that P2P lending will ever benefit the lenders. Unfortunately, average savers (investors, to be accurate) doesn’t know this and probably will never understand this.

If you really want to help your customers, please lend to SMEs as a bank, and pay most of the interest to your customers who has savings account with you. You, as a bank, can understand the risks involved, and should have the stomach for it. If borrowers mass default on their loans in a concentrated period of time, the worst case for you is to run down your capital reserve. However, in P2P lending, your customers will see a large chunk of their money accumulated over many years (or decades) disappearing from their accounts.

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Any P2P products will technically be Investments not Savings - and also only be a stopgap for when we are not a bank.

Also the dynamics change if better credit assessment through integration with a transactional platform like Spend and metadata like CF forecasts leads to different credit ratings. This hasn’t been done before.

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I fully understand that, but I worry average “savers” may not. Because P2P lending (in fact, many forms of lending) has many similarities with cash savings accounts - they save (invest) a set amount of cash for a fixed period of time in return for a fixed amount of return, and the rate of return over time is measured by interest rate. It will likely lead to confusions and many may wrongly believe that they are saving rather than investing.

Roughly speaking, when will Dozens become a bank? If the plan is in under a few years, I don’t think Dozens really need the stop gap. The time to close the book for a 5 years loan defaulted in the 4th year and in the process of recovering can be very lengthy. It only makes (a bit) sense if the time scale is in 10+ years. Even that, I still don’t like the idea of making P2P lending products available to the user base Dozens is targeted at - savers and first time investors.

This may haven’t been done before by P2P lending platforms, but big banks are certainly doing it. Adding this information may help reduce the chance and scale of under-estimating credit risk, but it won’t eliminate it. As I said, banks have their skin in the game, but P2P platforms don’t. Therefore banks are more motivated to do it right. Even P2P platforms try their best to do the right thing, they often don’t have the resources big banks have. Having access to cash flow and forecast is only one aspect of it. Big banks also have access to industrial expertise, supply chain information, market research and many more which may not be easily available for a smaller player such as a P2P platform.

More importantly, this doesn’t do anything to help reduce or diversify away the geographical and geopolitical risk. Being a risk that can be diversified away means investors are not compensated (rewarded) for taking on the risk. The result is lower risk-adjusted return for retail investors comparing to financial institutions and professional investors. If a retail investor really wants to participate in the high risk and (potentially) high return lending business, high-yield bond (a.k.a. junk bond) is often a much better choice.

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For reference, a few big P2P lending platforms in the UK are advertising the following interest rates:

  • 2.0-5.3%
  • 4.5-6.5%
  • 6.2%
  • 4.5%
  • 3.75-4.1%

As you can see the numbers are around 5%. This can be easily achieved by investing in a GBP hedged
global high-yield bond. Don’t forget the HY bond comes with the additional benefit of much higher liquidity. In plain English, it means the HY bonds are easier and quicker to buy and sale at their fair price, especially in bad market conditions. Try go around the Internet forums and find out how many investors are still trying to get their money back from some P2P lenders after the COVID-19 situation? You will be surprised by it.

The point I’m trying to make is, P2P lending may benefit Dozens as a business, but I can’t see how could invest in P2P lending benefit the retail investors - the Dozens’ customers. In my view Dozens isn’t a company making profit by putting their customers at disadvantage, and P2P lending clearly doesn’t fit in this.

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Still finalising some of the details on this @Peter, but will share soon. Is there something specific you’re hoping to see in this screen?

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Here’s one I prepared earlier…

I’m hoping for notes, ability to upload receipts (pictures, PDFs), the raw merchant name (as well as the enriched name), ability to manually add receipts / breakdown line items…

…but mostly just looking forward to seeing what you’ve done with it. I’m loving the direction of travel!

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Thank you @Peter - it is very pleasing to hear that the new look spanning multiple segments resonates with you, indeed we have invested a lot of time (read design and technology) and benchmarking in arriving at this point. Part of that benchmarking work was on price (@gt94sss2 this is relevant to your question too).

You are right that there are plenty of free business banking services offered by others, I am sure as a hook into their ecosystems. However, the problem with these ‘free’ accounts is that they (unlike these providers’ personal offerings) are typically limited in either maximum balance or maximum number of monthly transactions. Users quickly start having to pay per transaction over those thresholds, or to upgrade to a more expensive account to actually DO business banking. So, paying customers end up subsidising the free accounts, making the paid offerings more expensive (based on our cost benchmarking, ‘Challenger’ accounts actually end up costing users more than their High Street counterparts on a blended basis, once standard account volume / transaction activity is put through them). An even more cynical read might be that paying business users end up having to subsidise the free consumer accounts within these ecosystems, which we simply will not do. Dozens Business and Dozens Black for that matter, will always be about transparent pricing for what THAT user consumes.

Peter, with regards to your query about transferability of business features to personal, building cross-segment to consistent design and technology systems is one of our fundamental principles for ensuring cross-pollination of features - a long way of saying, yes, we will build this stuff in a way that can be repurposed for the right consumer use cases. After all, that margin between sole-trader and personal user is very fine!

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Thank you for the considered comments @gt94sss2. I’ve addressed the question on price in my response to Peter, and AC has covered P2P, but I have plenty to get into here directly.

b) Dozens Black CAN be included, but Business can always function as a standalone. There will be a separate KYB process which accounts for the additional complexity of Ltds, etc., ensuring that different legal structures (compared to only sole traders) can be supported by the offering.

c) For these types of businesses (i.e. those with more than one user), we will absolutely be empowering delegate users, with tiered rights and security requirements such as four eyes checks on payments. As a business ourselves, these ‘profiles’ are essential to the way we do our business banking and our own user persona has been drawn upon to inform the product.

d) These would be both physical and virtual, with additional per card charges for physical card issuances over a set allocation.

e) The release product would be app initially, with desktop to follow subsequently. Related to my response in c), the ‘way’ businesses actually bank is important to us, and there are some jobs / use cases where the user will simply be more comfortable doing this behind a computer.

f) The point of the subscription price is that we have a sustainable offering before any user related revenue-generating activities. On this basis, it isn’t a requirement that we retain business interchange, but we obviously reserve the right to should it be accretive to the overall value proposition.

g) Yes, we have the partnerships in place already to support multiple currencies.

h) Dozens family is the third horse in the Dozens product stable: 1) Consumer (‘Black’); 2) Business; and 3) Family. Just as an individual can integrate their business life with their personal (Black plus Business), they can integrate themselves with their family, creating a joint account, not only for you and your spouse, but for children too. A little like delegated Business expense cards with centralised control over limits, with Family, one could manage a kid’s pocket money with via the app and delegated debit cards. This proposition is in earlier stages of development relative to Black and Business, but completes the trinity of economic units: Individual, Business and Family.

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Yep great points @Roman - clearly you have spent a lot of time studying this, so would also love to talk to you more when the time is right. For now, I can confirm you are totally right about our mission and transparency constraints, and also that no product including P2P will be launched till we are sure of the structural rigidity and compliance alongside a customer value-add.

PS: For Save versus Invest, if its not principal
protected (like vanilla P2P), it can only feature in the Invest part of the app and not in Save/Grow. So to the first timers, it will compete for mindspace with ETFs not deposits.

This sounds like a pretty compelling product. I’m imagining a situation where you can provision new cards on demand, set payment limits for kids etc, a space for bills, then spending accounts for parents…

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From a less informed member of the community but one ‘invested’ in the basic thesis there is much to like here but most of it feels intrinsically linked to the runway challenge which I guess it was hoped to resolve for Dozens through PI B2B profitability which has been hampered by the ‘big cold’. Nonetheless it remains a challenge and, whilst other less transparent operations may have similar challenges, it is difficult to appeal to anyone other than the niche early adopter community, prepared to tolerate a degree of instability.

Looking at the refreshed app and the Zen approach (@Peter) there is much to like but superficial Zen belies the desire for true Zen, mindfulness cannot just be skin deep. As a proposition I would recommend Dozens to many but it still feels very Alpha / Beta in many ways and many are not prepared to tolerate that in their day to day banking. As such I have not attempted to persuade my family to onboard although hopefully only a ‘yet’ problem rather than a ‘forever’ one.

There have been discussions over vertical models and First Direct, once a disrupter, and yes it is possible for multiple niche offerings to offer something unique but I still welcome the comfy pair of slippers, even if they are not the best running shoes. In cycling there are endless discussions over how many bikes one needs with specificity driving people to multiple variations for different perceived benefits however when those gains are marginal and of little relevance to most users actually life can and should be far simpler albeit at a small cost. I would like to have Dozens as the sole financial app on my phone if it is good enough across the board, however that is delivered (integration of other services or delivery of own), but true to the Spend Save Invest journey. Just look at the basket case of apps and separate services one needs to understand as an EV driver, it is an impenetrability many will not penetrate effectively.

With respect to the business proposition for me it is fairly niche and I am unsighted as to the market opportunity. I am a director of a management company charged with the community aspects of the group of properties within which I live. As such we have limited transactions and a modest sinking fund. At present I enjoy ‘free’ business banking suitable for my needs but no ready means of making the sinking fund work for us. As long as I could get it to wipe its nose then I would move. My wife is currently self employed but I doubt if she would be interested in paying to separate her personal and business finances although it would undoubtedly make bookkeeping easier.

The developments around family seem very exciting, broadly aware of some of the other offerings now available. A little bit late for me to benefit personally but I can see it as an attractive proposition for young families and so as an albeit small investor it feels right especially linked back to my thoughts on zen and simplicity.

Quiet for a while so apologies for the rambling thoughts, others have added far more insightful feedback but I still like the general direction of travel, we just need to fix the runway so that we can start operating more / larger aircraft!

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@AC I remember you mentioned that the fund risk rating in Dozens invest are calculated based on their historical volatility in the virtual meeting between community members and Dozens. At the time of the meeting I didn’t think too much about it, but now I’m actually thinking about it, the method itself is not bad, but judged by the outcome of the risk ratings, Dozens might have done something really wrong with the method.

Let’s go back to the example I mentioned in the virtual meeting - the US Treasury Bonds (Vanguard USD Treasury Bond UCITS). I remember I said that this fund is going to have equity-like volatility and bond-like return, and you corrected me saying that the fund risks are rated based on their historical volatility, which means a fund like what I’ve described wouldn’t have the risk rating 2 of 5. This sounds sensible without thinking too much about it. However, as soon as I checked the index the fund’s KIID, I realised that the fund only had 4 years of history returns (since 2017), and they are all positive without too much swings. This immediately made me worried about how did you calculate the volatility of the fund.

My first reaction to that is, you could have calculated it based on the available history of the fund itself - 4 years of data, which will be very very wrong. To proof whether I’m right about the assumption, I pulled the data of the intermediary US Government bonds data from here (ITT in the spreadsheet), which is the data closest to the index the fund tracks. I have also pulled the exchange rate data from here in order to convert the data to British Pounds for UK based investors.

After analysing the data between 1950 and 2020 - 71 years of data, I got the following results:

  • Standard deviation in USD is 7.2 and in GBP is 12.6 - three-quarters higher than in USD
  • Max 1 year drawdown in USD is -4.9% and in GBP is -7.9% - more than three-fifth worse than in USD
  • Max drawdown (over 1 or more years) in USD is -4.9% and in GBP is a staggering -12.3%
  • Yet, the 71 years annualised nominal return in USD is 5.64%, and in GBP is 5.67% - only 3 basis points difference!

Off-topic: unless the investor has future USD liabilities, I cannot think of a single reason for someone in the UK to invest in the currency unhedged USD government bonds. The investor would be taking uncompensated currency risk if they do that, and the result would be exactly what I had described - equity-like volatility and bond-like return.

Now, let’s get back to the topic. I don’t think Dozens will rate a fund at risk 2 of 5 if you knew the fund’s value had dropped nearly one-eights in the past. If my assumption is correct and you are calculating the volatility based on short term data, I would worry many “low risk” funds on the Dozens invest shelf are suffering from the same issue. If the above is true, I would strongly recommend you to reevaluate the risk levels of all funds in Dozens invest which has a risk rating at 4 or below using a much longer time frame. 30 years is a good starting point. An appropriate alternative should be used for funds with a short history. Many funds may be riskier than what you had initially thought.

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Sorry to have missed it! Keen for any feedback from anyone there :man_bowing:

In other news, I’m watching the Google keynote and the new Android UI is very sympathetic to the Dozens direction of travel…

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Hi Roman,

Like our chat yesterday, this is a lot more complex and follows a lot of analysis and product governance.

While a lot of this isn’t public, I can point you to SRRIs in the UK - google this up, and know that all our assessments follow this industry standard, and effectively map our ratings to these published SRRIs. In other words, we don’t have the privilege of setting these calculation parameters or variables like historical duration. We simply own the risk assessment for the individual, that then gets applied and mapped to standardised SRRIs.

If you would like to continue the more theoretical discussion of how SRRIs should be calculated (given that we don’t control it), Suzanne (a Director and MLRO at Pi, but also a surgeon, derivs delta one structurer, lawyer and therapist in her spare time!) is a great person to chat with. @RobD can put you in touch.

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Hello @Sandesh and @Tatia_K :wave:

I was just wondering if the plan is still for you to give us a little of your time, or whether things have moved on?

Very sorry if this has been discussed and I’ve missed it!

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I have no intention of diving into the technical details about SRRI. But it’s worth mentioning that SRRI does not take the currency risk into consideration if the underlying assets (e.g.: US Treasury bonds) is in the same currency as the fund (e.g.: the Vanguard USD Treasury Bond ETF), regardless of the investor’s home currency. That’s because a fund simply doesn’t know what is their investors’ base currency. As the result of that, a very low SRRI (1 of 7) fund in USD can be mostly a flat line for an US investor in USD but very volatile for a British investor accounting in GBP. This is just one example why the SRRI alone is not good enough to evaluate the risk of a fund for a specific (group of) investor.

Since Dozens only serve British investors (for now), you should adjust the risk based on British Pounds if the fund’s base currency is something else. Although, I have to say that I’m unsure if this violates the regulatory requirements. The regulations sometimes make no sense to me.

Or, a much better approach is to replace that fund with a currency hedged version of the same thing, and all the problems goes away. GBP investors will get the same volatility as the USD investors, usually at the expense of only a slightly higher OCF. Generally speaking, it usually makes sense to use currency hedging for international bonds, and most investors should do this if they buy international bonds fund.

Roman, as confirmed to you on the call, Dozens ratings are currency adjusted to the extent possible, so we are aligned.

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Hi @peter

We’ll be bring you some more updates from @hannah , @Sandesh and @Tatia_K in the coming weeks :slight_smile:

Also, AC won’t be available for the next few days as he deals with a Covid-related situation at home. All ok, but keep your questions coming in and he’ll be back next week.

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Thanks, Rob. And best wishes to @AC and family.

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As promised, I’d like to share the first half of our latest Community meeting with you all.

@julia talks us through a little more detail around the process that lead to our new app designs, and I’m sure she’d be happy to take any further questions you may have on this.

It was great meeting you @Roman and @mimote Thanks for your valuable feedback.

We’ll hopefully be making this more of a habit moving forward, so don’t worry if you missed out this time.

I’ll share the second half (with investment chat) soon. Enjoy :slight_smile:

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