Funding Circle Holdings plc (FCH) Earnings Call Transcript & Summary

Good day, and welcome to the Funding Circle Half Year Results 2021. At this time, I would like to turn the conference over to Samir Desai. Please go ahead, sir.

Good morning, and thank you for joining us for our H1 2021 results. Today, you have me, Samir Desai, Founder and CEO; Oliver White, CFO; and Lisa Jacobs, CEO Designate, joining the call. We are here to talk about our H1 2021 results. I will introduce the results and talk to the first section on our model. Oliver will cover the financials, and Lisa will talk to our priorities and future growth initiatives. But before we start, as you will have seen from the statement this morning, I have decided that after 12 years, I will step back from being CEO from the first of January 2022 and move to a new role as a Non-Executive Director on our Board. Lisa Jacobs, our U.K. Managing Director, will become our new CEO. I have made this decision at a time when I believe, as you will see from these results and those over the previous 6 months, that the business is in the strongest position it has ever been. Lisa and I have worked closely together for 9 years. She has done an amazing job running our largest business, and I'm delighted she will become our new CEO. She is the best person to take the business to the next level in this exciting phase for the company. I also want to reiterate that I am not leaving the business and remain fully committed to Funding Circle as a founder, Board member and shareholder. I truly believe that we are entering the most exciting period of growth for our business over the next few years, both in our core business and new products, and I'm looking forward to supporting Lisa and the team in my new role. Now let's get on to the H1 results, which I'm pleased to say represent a very strong period for Funding Circle. 2021 has seen us continue the strong momentum we experienced in the second half of 2020. Our loans under management reached a record level of approximately GBP 5 billion in H1, and we recorded originations of GBP 1.6 billion. In the U.K., originations were up 109% year-on-year. Our technology platform is continuing to revolutionize the small business borrowing experience. And now 60% of loan applications receive an instant decision up from 50% at the end of the year. We have increased our expectations of loan returns on our platform for the second consecutive time. COVID was an unprecedentedly severe recession for small businesses and the improving loan performance expectations demonstrate the quality and resilience of the loans we generate on our platform. We also continue to see high levels of demand from institutions to fund loans. This all translates into a very strong financial performance. The group delivered total income of GBP 120.6 million, up 19% year-on-year. We reached profitability for the first time in H2 2020, and I'm pleased to say we exceeded expectations in H1 2021 to deliver GBP 53.3 million of adjusted EBITDA and GBP 35.5 million of operating profit and have now been profitable for a full 12-month period. This all results in strong growth in net assets to GBP 254.1 million. Looking ahead, we are seeing a number of exciting structural trends that really benefit Funding Circle, and we will talk about these later on. In particular, this year, we have continued to see the acceleration in the adoption of online small business lending, which will benefit Funding Circle not just through the second half of 2021 but beyond. Following the COVID government guarantee programs, we have transitioned to operate our core loan product alongside the recovery loan scheme in the U.K. as well as the existing SBA program in the U.S. We will continue to roll out our Instant Decision Lending platform with a long-term target of 80% of loan decisions automated. We are also leveraging our technology platform to launch a number of exciting new solutions, including embedded finance via an API; our new FlexiPay product, which launched recently and has had exciting initial results, and we have opened up a wait list for our Charge Card product. The group has an attractive financial profile. Powered by the U.K., we expect to be adjusted EBITDA profitable on an ongoing basis and we'll invest in additional growth opportunities. Our mission at Funding Circle is to build the place where small businesses get the funding they need to win. We do this by delivering an amazing experience for small businesses powered by machine learning and technology. At Funding Circle, we have a long-term strategy, and you can see from the chart on the left-hand side of the slide that we have consistently grown our loans under management whatever the economic environment. Additionally, there are a number of structural trends that have accelerated as a result of COVID, and we stand to benefit from going forward. We are seeing a significant acceleration in the adoption of online borrowing. There continues to be strong demand from investors to fund loans despite the impact of COVID, demonstrating the quality and performance of our loans and the resilience of our platform. Small businesses have ongoing financing needs to support their business as they exit COVID. And finally, government support, not just in the U.K. and U.S., but across every country in the world for small businesses, has shown how strategically important they are to economic growth. Small business lending is underserved by traditional lenders. On average, it represents less than 2% of bank balance sheets, but small businesses are 50% of GDP and 70% of employment. Small businesses are underserved as there is a big disconnect between how much the financial system cares about this type of lending and how much we, as society, care about it, and that is why Funding Circle exists. Over the past 10 years, we have aggregated huge amounts of data and loan performance history, allowing us to develop incredibly sophisticated machine learning models. Our models include the GBP 13 billion of loans we've lent to small businesses since 2010, 850,000 loan applications, data on 750 million repayment events, and we have built a proprietary data lake with 2 billion data points in it containing data on 26 million small businesses. Our eighth generation machine learning models are 3x as predictive as traditional commercial bureau scores, and this is creating a deep, competitive moat around our business. Our technology platform is revolutionizing small business lending. Borrowers can apply in 6 minutes, 60% of loan applications get a decision within 9 seconds and are funded within 24 hours. Through this process, we deliver high credit quality loans and competitive interest rates for borrowers comparable or cheaper than banks. It is the combination of the experience we deliver on our machine learning and technology platform with loans funded by investors that is the innovation that Funding Circle has created. This technology delivers huge benefits to our customers, but also to Funding Circle. We reached 50% of loan decisions automated by the end of 2020, and I'm pleased today to announce we met another milestone with approximately 60% of loan decisions in the U.K. receiving an instant decision. We are well on our way to reaching our long-term target of having 80% of loan decisions automated. Instant Decision Lending delivers a number of benefits to customers but also to Funding Circle. We are seeing credit performance as accurate as non-instant decision lending loans. We are using the same risk models developed over the past 10 years and credit performance has been strong. We're seeing higher conversion from borrowers. Getting an instant decision can improve borrower conversion by up to 25%. Lower processing costs and scalability from this technology are driving operating leverage in our business. In the first half of 2021, U.K. loan originations were up 109% year-on-year without us adding any additional headcount. This technology also allows us to launch new products and you may have seen we launched FlexiPay to our existing customers recently, and we will talk about this a bit later. The great experience we deliver to small businesses leads to stable repeat rates and attractive unit economics. The graph on the left-hand side shows the average number of loans taken out by a small business versus the months from taking the first loan. This shows very stable, predictable repeat rates across every quarterly cohort. The graph on the right-hand side shows the lifetime value divided by the marketing customer acquisition costs. This shows that we're profitable on a first loan basis after marketing costs. And because of the stable repeat rates as borrowers take out more loans, our unit economics improve as there is very little marketing costs associated with repeat loans. Over 48% of operating income in the U.K. came from existing customers in H1 2021, which improves the quality of income and increases the strong moats around our business. We are reaching a level of scale, brand awareness and customer satisfaction in the U.K. that is unmatched by other fintechs. We now have GBP 4.1 billion of loans under management, which gives us approximately 4% market share. We have brand awareness of around 50%, which is significantly higher than other fintechs and is approaching the level of the top 4 banks. In terms of customer satisfaction, we have Net Promoter Scores of 83. That compares very favorably to the large banks and over 80% of customers tell us they would come back to Funding Circle first in the future. Once they experience this way of borrowing, they never want to go back. I am so proud of the huge economic impact our team is delivering. Since 2010, we have originated GBP 13 billion of loans to over 120,000 small businesses. As we've talked about in the past, our economic impact report with Oxford Economics showed that lending through our platform in 2020 alone created and sustained 135,000 jobs and added GBP 10 billion to GDP. Typical Funding Circle borrowers are not start-ups. They've been trading for an average of 12 years, have 8 employees, GBP 1 million of revenue. On average, loans are GBP 80,000, and the average term of the loan is around 50 months. An example is a business like Bird & Blend, who saw a huge increase in demand during lockdown last year and managed to increase their headcount from 80 people to 100 during the last year. Supporting businesses like Bird & Blend are the reason we started Funding Circle in the first place, and the team and I are as passionate about supporting them today as we've ever been. I'm now going to hand over to Oliver.

Thank you, Samir. The diversification of our investor base is of strategic importance to Funding Circle. As the pie chart on the left-hand side shows, our largest sources of funds are asset managers and banks. The proportion of banks is broadly stable, and the proportion of asset managers has increased since December 2020 as new and existing investors participated in the high level of CBILS originations in the half. Within each of these segments, we maintain a diversified investor base. Retail continues to diminish its proportion, now down to 7%. The bond program reduces through loan amortization and through the successful sale of the 2 U.S. warehousers to an asset manager. National entities increased, reflecting Funding Circle's participation in the U.S. Federal Reserve's lending program to facilitate lending to SMEs, the PPPLF program. The right-hand pie chart shows a proportion of the loans under management provided by Funding Circle's balance sheet. As a reminder, Funding Circle deploys its equity where it makes the platform stronger. This may include limited co-investment and investment in new products. We see the ability to do this as a source of competitive advantage. We do not deploy capital with the sole purpose of deepening profit from investment returns. We intend to continue to recycle some of the investments over time as an opportunity for realizations allow as demonstrated by the previously announced sale of the U.S. warehouses in June. Funding Circle's balance sheet now represents 2% of the total loans under management. This is GBP 105 million of equity within the guardrail communicated the full year results of being less than this December 2020 level of GBP 118 million. Turning to our loan performance and the returns provided to these platform investors. We continue to see an improving outlook for Funding Circle loans. Our borrowers continue to be resilient and loan quality continues to be strong, notwithstanding the uncertain economic environment. Our projected returns shown here include a forward-looking element. We continue to be prudent, forecasting ongoing stress. As government support and interventions phase out, ongoing uncertainty continues. In the U.K. and also in the U.S., the latest forecast shows a continued improvement in expected returns for our investors. The U.K. is shown on the left and the U.S. on the right. For each annual cohort of originations, we show how the expected returns have evolved. As you can see, despite the unprecedented impact of the pandemic, even though cohorts most impacted are returning at 2% plus return to our investors. This demonstrates the robustness through the cycle of the asset class that Funding Circle has developed. This slide illustrates how Funding Circle makes money. Within our operating income, we received transaction fees and servicing fees. Transaction fees charged to borrowers are driven by origination volumes and account for nearly 60% of total income. Typical yield is circa 5%. Servicing fees are more of an annuity stream charged to investors at 1% per annum and driven by the loans under management. Servicing fees have increased over time as loans under management has grown. Together, the transaction and servicing fee income make up around 80% of Funding Circle's total income. Investment income is driven by our equity invested where it makes a platform stronger. The yield will depend on the nature of the investment and its risk/reward characteristics. Investment income represents 1/5 of total income in half 1 '21. Over time, we expect operating income will make up a greater proportion of total income. Turning now to Funding Circle's half 1 financial performance. Let's begin by looking at the group results and overview. Here, we show the performance in half 1 2021, alongside the comparatives of half 1 2020 and half 2 2020. Half 1 2021 saw a continuation of strong CBILS originations in the U.K. and the recommencement of the PPP program in the U.S. CBILS ended at the end of March and PPP ended in May with subsequent fulfillment under both programs. June saw the restart of our core product in the U.S. and the restart of core and the new recovery loan scheme in the U.K. Loans under management was at a record GBP 4.9 billion, up from GBP 4.2 billion in half 2 2020. Origination volumes were GBP 1.635 billion, slightly up from half 2 2020. The strong volume performance was reflected in total income of GBP 120.6 million, up 19% year-on-year. Adjusted EBITDA is GBP 53.3 million and operating profit is GBP 35.5 million. This is the second consecutive half of positive operating profit. The overall profit performance demonstrates the power of Funding Circle's platform model. I am pleased to show the rate of profit conversion from income and conversion into a cash balance of GBP 168 million. Net assets grew to GBP 254 million. As I'm sure you will agree, these are a strong set of results, demonstrating continued progress. I will now explain these results in more detail. In the U.K., loans under management grew to over GBP 4 billion as strong origination levels in half 1 and prior periods flow through. Loans under management is up 59% year-over-year and 25% half 1 over half 2 of 2020. Originations are at GBP 1.381 billion. This is up 109% year-on-year and 5% down half 1 over half 2 2020 as the end of half 1 2021 saw the market transition from the CBILS program. The strong volume performance figures through into record income of almost GBP 100 million, up 67% year-on-year. The U.K. has continued strong profitability seen in half 2 2020 with an adjusted EBITDA of GBP 41 million, a margin of 41% and an operating profit of GBP 31 million. This impressive margin shows the power of Funding Circle's platform at scale. Adjusted EBITDA grew GBP 12 million from half 2 2020 to half 1 2021. Operating income grew GBP 5 million, fair value swung GBP 9 million, reflecting actual performance in the half and retaining a prudent forward view. And there was a small increase in marketing costs, reflecting higher broker costs and marketing ahead of the return to core and the launch of the RLS loans. Turning to the U.S. U.S. loans under management was GBP 733 million, down 9% year-on-year and slightly down in half 2. This reflected the expected roll-off of our pre-COVID loans and the limited originations in half 2, partially offset by new PPP originations. Of the GBP 733 million of loans under management, GBP 333 million are PPP loans. We anticipate these loans will be forgiven in half 2 2021 and half 1 2022. Originations in the half were GBP 247 million, primarily through the restarted PPP scheme. This program has some different characteristics to the 2020 programs. Average loan size was lower but the yield per loan was higher. In half 2 of '21, we had 3x the number of borrowers than in half 2 2020. Total income was GBP 20.2 million. An additional GBP 16 million of PPP income was earned in half 1, less GBP 1.5 million of direct costs. As these loans are funded by the Federal Reserve's liquidity facility, they are on Funding Circle's balance sheet, although we have no Funding Circle equity invested. As these loans are not hold for sale but will be forgiven by the U.S. government, we are required to spread this transaction fee earned over the expected life of the loans. This expected life is until the projected forgiveness of these loans. This GBP 60 million will be recognized in half 2 of 2021 and half 1 of 2022. In the half, the U.S. is adjusted EBITDA positive for the first time. This is primarily driven by the investment adjusted EBITDA of GBP 20.9 million, including a GBP 7.8 million fair value gain, again, reflecting half-one performance and retaining a prudent forward view, but also a GBP 5 million gain from the sale of the U.S. warehouses. Operating adjusted EBITDA was negative GBP 9.1 million, but this is after the impact of the aforementioned PPP transaction fee deferral of GBP 14.5 million. Operating profit is a positive GBP 3.8 million. Putting this together for Funding Circle as a whole. Half 1 of 2021 saw record loans under management of close to GBP 5 billion, up 33% year-on-year and originations of GBP 1.6 billion, in line with half 2 of 2020. Total income of GBP 120.6 million is up 19% year-on-year and is in line with half 2 2020 total income. Strong loans under management and originations has led to operating income of GBP 94.5 million, up from GBP 64.8 million in half 1 '20 and GBP 90.9 million in half 2 of '20. In line with our expectations, investment income has reduced over time due to the natural roll-off of these loans within these investment vehicles. This top line performance feeds through into group adjusted EBITDA of GBP 53.3 million, up from a loss of GBP 84 million in half 1 2020 and GBP 20.3 million profit in half 2 of 2020. Operating adjusted EBITDA is up at GBP 19.1 million, and investment adjusted EBITDA, reflecting the fair value gains, is up at GBP 34.2 million. Compared to half 2 of 2020, fee income is up GBP 4 million, investment income down GBP 4 million, fair value swing GBP 30 million and costs improved by GBP 3 million with a small increase in marketing more than offset across other cost lines. Operating profit grows to GBP 35.5 million, up from GBP 7.2 million in half 2 of 2020. Turning to costs. Operating expenses have continued to be actively and tightly managed. Half 1 costs were in line with half 2 of 2020 and 12% down year-on-year. As anticipated, marketing costs were slightly up in half 2 at 29% of operating income but are down year-on-year. We are beginning to see a return to more normal levels of marketing spend and expect to see broadly this level of marketing spend continuing. Net assets are GBP 254.1 million, up GBP 37 million since end December, as the profit converts into net asset growth. The net asset position includes cash of GBP 168 million, up GBP 65 million from the December '20 cash balance of GBP 103 million. Within the net assets are equity investments of GBP 105 million. Funding Circle deploys this equity where it makes the platform stronger. This may include limited co-investment and investment in new products. Absolute equity invested at June 2021 is GBP 105 million. This is within the guardrails we communicated at the full year results of no more than the equity invested at that time of GBP 118 million. I would now like to hand over to Lisa to take us through our ongoing priorities and some new products.

Thank you, Oliver. Today's results are another example of the strength of the Funding Circle business model. I'm privileged to have been asked to lead Funding Circle into this next exciting stage of growth. And over the next few slides, I'll show you that there are a number of future growth opportunities to be excited about. I know many of you on this call, and I look forward to working with you again. But for those of you who I don't know, I look forward to meeting you in the future. A little bit about my background. I've been with Funding Circle for 9 years, firstly as Chief Strategy Officer and most recently as MD of the U.K. business. It's been really inspiring to see the business grow and evolve over the last 9 years. We've achieved a great deal as a company so far, but there is still so much more to come. As I look ahead to the future, we exited 2020 with a great deal of momentum, and I am pleased that we've been able to continue this during the first half of this year. The Funding Circle flywheel drives significant competitive advantage. As we get more repeat customers on the platform, this generates more data. And this feeds into our machine learning models which improve. This allows us to deliver a better borrowing experience with more automation, less documents required, faster decisioning and that, in turn, drives higher conversion, lower costs and more operating leverage in the business. This technology allows us to launch new products, which expands the size of our ecosystem, which in turn leads to more repeat customers and more data. Since COVID, we have seen an acceleration in a number of structural trends, which benefit Funding Cycle, and we've proven the power and resilience of our model. In the U.K., following the completion of CBILS, we are operating our core nonguaranteed lines for borrowers as well as the Recovery Loan Scheme for other borrowers. We were the first fintech platform to be accredited to the Recovery Loan Scheme, and we're proud to be playing our part to help businesses at this time. Our other priority for this year in the U.K. is launching new products using our technology platform to help solve more small business problems and I'll talk about this more over the next few slides. In the U.S., now that the PPP has finished, we're originating government-guaranteed loans through the SBA on behalf of banks. Alongside this, we continue to operate our referral model for borrower needs outside these offerings, partnering with other providers given the scale and diversity of the U.S. lending ecosystem. The new solutions that we have been working on in the U.K. are a particular source of pride to me. I've seen firsthand the level of innovation and creativity across the team to get us to the stage where we're ready for beta testing. Our new API will allow us to natively embed our Instant Decision Lending technology into partners' websites and platforms. We've been building the technology since the beginning of the year, and we're now in the sandbox testing phase with about 5 initial partners. These are in the commercial finance space initially, and through 2022, we expect to onboard new partners and optimize the API. We're focused on helping solve more problems for our customers and the new products will help support small businesses to manage a number of cash flow and payment challenges. These new products also deliver a number of benefits to us as a platform. Firstly, they bring us into a more frequent part of customers' lives. Typically, our existing customers use our core loan product every 1 to 2 years. The FlexiPay card brings us more into daily and monthly usage. This actual usage enables us to accept more customers who in time graduate to longer-term core loan products, which supports growth in the core lending. Additionally, the market is huge in this space. We estimate that over GBP 1 trillion is the addressable market for U.K. small businesses. And finally, these products align with our mission as a company. At our results in March, we spoke about launching of payment finance products that will help small businesses spread the cost of bills over a 3-month period. And today, I'm really proud to say that FlexiPay is now live and in beta testing for our existing customers. This is a unique payment product offered, empowering small businesses to buy now and pay later. It's powered by our machine learning and technology platform, and businesses can apply within minutes and access up to GBP 30,000 immediately. They can then settle any outstanding invoices instantly for a one-off 3% fee and spread the repayment over 3 months interest-free. We launched FlexiPay in beta earlier this quarter, and whilst it's still early days, the feedback has been really positive. Firstly, you can see on the right-hand side of this slide that we have customers across the entire U.K. that are starting to access FlexiPay, and the feedback shows that this is a product that customers feel can significantly help them to manage their payments to suppliers. And I wanted to highlight 2 examples. Both Livity from Intrit and Carl from Advanced Joinery were 2 of the first users of FlexiPay, and both spoke about how using FlexiPay enables them not just to manage their cash flows, but also to manage and improve their relationships with their own suppliers, which could lead to better terms in the future. Finally, I wanted to spend a minute on our card product. As Samir mentioned in March, we are planning to launch a Business Charge Card product to help small businesses finance their day-to-day spending. The wait list is open and we're now well on our way for a 2022 launch. I hope that shows you the progress we're making with these new products and the possible opportunities going forward. And I wanted to finish by saying how excited I personally am about our future. We've come a long way in the last 11 years, and the business today is the strongest it's ever been, but our best days are certainly still to come. I look forward to updating you all on our progress in the future and hopefully meeting you all in due course. Now I'd like to hand back to Oliver who will take us through the outlook.

Thank you, Lisa. Turning to the full year outlook. The business performed strongly in half 1 and the financial performance was above our expectations. We are mindful of the uncertain economic environment, however. In line with our expectations, there has been an initial reduction in lending as we have transitioned to operating our core loan product alongside government guarantee programs in the U.K. and in the U.S. As the economic environment becomes clearer, we anticipate an acceleration in lending, and we are well placed to capture this going forward. We continue to expect adjusted EBITDA will be skewed towards half 1 with an expectation of half 2 adjusted EBITDA profits in the low single-digit millions. As a reminder of how we think about Funding Circle in the medium term. The U.K. is the engine of Funding Circle. It represents 80% of group total income. The business continues to offer operational leverage, is adjusted EBITDA and operating profit profitable and indeed has been adjusted EBITDA profitable since 2018. It is also cash generative. The U.K. business has strong growth opportunities in the core market over the medium term. Additionally, we have growth opportunities in the U.S. and in new products. The U.S. is 5x the size of the U.K. market, but in earlier stage of development. PPP provided a boost to volumes and revenues in half 1 of '21. Post PPP, as we invest to grow market share, the U.S. will likely be adjusted EBITDA loss making for the next few years. We will carefully manage that level of investment. New products represent a big but early-stage opportunity to support more customers by leveraging our technology platform. We announced the beta test of FlexiPay. These new products will generate a small income contribution initially stepping up in the future following successful rollout. For the group as a whole, powered by the U.K., we expect to be adjusted EBITDA profitable on a go-forward basis and will invest in additional growth opportunities. Thank you. This is now the end of the presentation. I would now like to invite any questions to Samir, Lisa and myself.

[Operator Instructions] We will take our first question today from Mohammed Moawalla of Goldman Sachs.

Good morning, everyone. First of all, Samir, thank you very much for everything you've done on Funding Circle and at least sort of developing the business as it sort of come public and best wishes in your role as certain non-exec and staying with the firm. And Lisa, obviously, many congratulations on being made the CEO. Look forward to speaking to you more going forward and I guess replicating the success in the U.K. across the rest of the group. I had a couple of questions, guys. Firstly, and maybe this is for Oliver. As you look to kind of bridge away from the government schemes to the -- more the commercial market, it seems like there's going to be a bit of an air pocket between the first and the second half of this year. Can you talk about how you're managing that, how you've kind of factored that into your outlook and how is your visibility into the second half, but when do you expect the visibility to change because as we think about the growth trajectory in the group beyond 2020, can you help us kind of frame the various kind of puts and takes around the kind of recovery of the growth? And then related to that, I know in the past, Samir, you have said that these new product developments are still likely to come over the medium term. Could you be a bit more helpful to us in terms of when we could start to see sort of the early benefits? And then my last question is really around the kind of operating leverage in the business has been pretty good. You were obviously backing down on the cost structure during the pandemic. But at the same time, you've driven more automation into the model. So how should we think of the pace of operating leverage going forward? And specifically, are there any kind of discretionary costs such as marketing that could come back that we should be mindful of? Or is structurally the rate of operating leverage now going to still be pretty good given -- as you drive more growth, a lot of that is in a more automated fashion.

Thank you, Mo, and good morning to you. I'll begin maybe with the first and the third of those questions. So what we have said is we would expect a slowdown in the volume of lending as the market as a whole, not just Funding Circle but the market as a whole transitions from the government schemes towards the end of Q2 into the go-forward, which in the U.K., for example, is a mix of our core lending product plus the new recovery loan scheme, which is also a government-guaranteed loan scheme. And we have, it's early days, seen a relatively low level of borrower demand, which is probably as expected. We think borrowers are exercising caution, are being prudent and we have the wider economic uncertainty to work through. As and when borrower confidence fully returns, the economies continue to come out of the lockdowns of the pandemic, we feel we're very well positioned to grow. In terms of where we get sight, I think incrementally, we get more sight. It won't just suddenly become clear. And I think we see almost month by month, week by week volumes beginning to increase as we go through the rest of the year. In terms of your question about operational leverage, I think we're comfortable we took very robust action on the cost base in the beginning of 2020 in Continental Europe and in the U.S. and took out significant amounts of structural cost, and in addition, managed costs tightly in every geography, in every activity. We don't see any cost coming back in hugely. It always amuses me a little bit when people talk about marketing as a discretionary cost and that marketing is how we go to market is how we connect to our customers. But as I mentioned in the presentation, the slight uptick in marketing we saw in half 1 of this year, that level is about what I feel comfortable with going forward into half 2 and into 2022. With that, maybe I pass over to Samir. Samir, if you got any comments also on what we're seeing in the market, I think that might be helpful as well.

Yes, sure. Just to reiterate what Oliver said, there has been a transitionary period in the market. We expected that. We also ourselves had to go through a transitionary period of rewiring our systems and reintroducing all the different segments that we offer into the -- of loans into the market. But we do expect an acceleration in lending. And we do believe we are continuing to see the acceleration in the adoption of online small business lending. We see higher search volume online. We see much more usage of digital channels by small businesses. And clearly, as the largest online small business loan provider, we're in a strong position to benefit from that. Notwithstanding that, there is uncertainty. We all need to see how the balance of the year plays out with COVID and as small businesses reopen. But overall, it's -- as we've said in our outlook, the H2 is playing out the way we expected. In terms of the FlexiPay product, as Lisa talked about, we recently launched that product. We've launched a waiting list for our card product. And the initial results are exciting, both in terms of user feedback, but also in terms of the frequency of usage. We are seeing the traits that we wanted to, which is that this brings us into the more frequent part of small businesses lives that use Funding Circle more, which allows us to then sell them more long-term products and accept more businesses onto the platform. Having said that, we only recently launched those product lines. It is early, and we are always prudent in how we roll out new credit risk segments, of which this is one. And so as we get more and more comfortable with that, Clearly, this is a much shorter cycle product, so we think we can learn much faster. But as we understand that better, we do believe that we can keep on rolling out these products and they should be a meaningful contributor to the group over the medium to long term. We wouldn't be doing this unless we felt that we could add something to the market with our unique technology platform. We couldn't have done this without the Instant Decision Lending, and that's really what gives us a huge competitive advantage. And as Lisa said, the SME payments market is just gigantic and applying our technology to it is an exciting avenue for us. So just to summarize, it's exciting early traction. I feel like the first days of Funding Circle when I look at this product. But equally early, and we need to see how things go before we can give more concrete guidance.

Great. And if I could squeeze 1 more in for Lisa. I presume, Lisa, no significant shift or change in strategy. That's going to be kind of more evolutionary as you become CEO. But maybe give your perspectives on maybe what worked really well in the U.K. and drove kind of the robust growth and profitability that perhaps you feel can be applied elsewhere in the group. And I know, in particular, we've got the new products coming on stream. We're doing a lot more with sort of existing customers. Could you give your perspective as you sort of take over the leadership, the kind of areas or opportunities you see in the next leg of Funding Circle's growth?

Thanks, Mo. And as you said, I've been here for 9 years, as I mentioned before and -- first as Chief Strategy Officer and then as U.K. MD for the last couple of years. And so I've very much been involved in that strategy design, setting that and driving that. And I think it's the right strategy. In terms of where the U.K. businesses and some of the foundations, one of the really big things that have been -- that we've obviously talked about through the course of presentation is the technology platform and how that's evolved over the last few years to the point where now, 60% of our lending is Instant Decision. And that will continue to increase to our long-term target of 80%, but it also provides the foundation for some of the new products that we're launching. FlexiPay enables us to -- you mentioned our existing businesses. The new products enabled us actually to become, as I mentioned, more frequent part of their financing allows us to enter the GBP 1 trillion payments market, but also really becoming part of that daily those monthly transactions that small businesses have. I think the other thing that we've seen, as Samir mentioned, is just a systemic change where businesses are moving more online, and this is very supportive of us over the long term.

Our next question will come from James Hamilton of Numis Securities.

A couple, if I may. Firstly, and obviously, the business is built around data and analytics. And on Slide 6, you sort of show this with your credit decisioning being sort of 3x better than bureau data. My question is, I was just wondering how you see this evolving. I mean, clearly, as you become larger and larger, you gather more and more data points to refine the pricing and obviously, the credit output. I mean, do you see 3x -- I mean, obviously, 3x is very good. But I was just sort of wondering is there any scope for that to improve. And the second question really for Samir. I was just sort of wondering, clearly, as the non-exec role, where do you see your areas of focus in terms of the help and support that you expect to provide to Lisa and her team?

Of course, I'll take the second one first, if that's okay. So I've worked with Lisa for a long time for the past 9 years. And I think we know how to work together well, and I'm pretty sure she's going to tell me whenever I overstep the mark or I'm doing too much. But -- it's a non-executive role, but I would expect to help the team more on the innovation and growth and the new product areas because those are the areas where I think I can add the most value, but it will be really supporting the team as opposed to driving those myself. And I wouldn't be doing this unless I felt that Lisa and the team could really take the business to the next level, a big believer, a big shareholder in the business and expect to continue to be a long-term supporter and shareholder for a long time to come. In terms of the analytics, I think it is part of the flywheel that Lisa described and it is becoming more and more powerful, especially now that we've been through a recession. One of the big questions about Funding Circle has always been you haven't been through a recession, how will your loans perform? Will all the funding go away? And actually, on all of those things, we've been able to show that the funding platform is incredibly resilient. We saw increases in funding onto the platform through the recession. And actually, the loan performance has been very resilient, very strong despite the severity of the COVID recession for small businesses. And that is something that is attracting even more funding to the platform now, but we've actually been through a recession. Adding the recessionary data on top of the new data that we're starting to get on from new products like FlexiPay, which would take us into monthly transaction flows and also the card product, where effectively, we'll start to get daily spend data on small businesses. I think our card product is very exciting as well, will come out next year. I mean, I think you'd be mad as a small business not to be putting most of your spend onto this card. So you can just see how the flywheel will continue to accelerate not just through the core loan product and the huge advantage we have in doing long-term loans and looking at the performance of those, which is difficult to know and impossible, I think, to replicate. But also, as we add all of this monthly, daily data, we do believe that the models will just keep on getting better and better and the moat around our business will just keep on getting deeper and deeper.

Our next question comes from Perlie Mong of KBW.

Yes. Congratulations again for great results. I think it's really proven the strength of the business model, so it's great. So just 2 quick ones on perhaps models and then maybe one on strategy. So the GBP 16 million deferred payment in the U.S. from the PPP loans. Can I just clarify that a little bit more? So is it roughly going to be released equally between half 2 and next half 1? What sort of assumptions are in the deferral and how big is that GBP 16 million versus like the income that you're generating from PPP loans as a whole? So that's number one. Number two is on Developing Markets restructuring. So just wondering where you are on that. You're reasonably happy with what you have in that space. Basically just outlook on differing market or whether there will be any more restructuring. And number three, we've talked about this a lot today already, but SME payments and FlexiPay. So clearly, it's a very exciting opportunity, and it's really great to hear about all the new products that you're rolling out. I mean, SME payments and buy now pay later are clearly both very hot areas at the moment. And whether it's large incumbent banks or fintechs, they are all trying to do a lot of stuff on that space. So just wondering whether -- I know it's early days, but would you have ambitions to perhaps you start to get into the payment space. So just thinking out loud, will you perhaps offer a product that allows SME customers to take buy now pay later payments from their customers, something like that. So yes, I'd just be interested to hear your thoughts on that.

All right. Thank you. Some good, meaty questions in those. So if I begin with the Payment Protection Plan accounting. So yes, that is spread, as I discussed in the presentation, over the effective life of the loan and given PPP loans are slightly unusual, that's defined as until the point they're forgiven by the government. Our models assume that would take about 16 months from origination to forgiveness, and the deferrals are spread fairly linearly over that period. At a high level, we would expect about half to fall into half 2 of '21 and about half to fall into half 1 of '22. I hope that answers your question. Yes. Samir, on Developing Markets.

Yes.

Yes. And so on the other 2 questions, on Developing Markets, as you know, we restructured those markets in March of last year really because we wanted to change the model and centralize operations in London. And so we did the restructuring, and the plan was to increase headcount in London. Now at March last year, I think we all know that COVID hit, and we didn't think it was a prudent thing to do to be rebuilding those businesses at that exact moment. So we are not currently originating loans in those markets. We have a small team focused on servicing the loans, and we'll reevaluate as the economy opens up, as things become clearer. But our priorities are those we set out in the presentation, which is the U.K. growing the core business, growing the U.S. and launching the new products. And we expect the Developing Markets business to continue to be breakeven as we evaluate what the best thing to do is there.

Just on the subject of Developing Markets, just to be clear, our provision is fully adequate. We have no intention to taking any more charges for that.

And yes, look, on the final question, we recognize that SME -- and on the final question, look, we recognize that SME payments to [indiscernible] well. But -- what we've always been very careful to do is really only play where we think we have a distinct competitive advantage, and we have something to add. And so what we've been able to develop over the past 10 years is this very deep understanding of small business credit risk, and we've built very sophisticated risk models, as we talked about earlier, that are 3x as predictive as bureau scores, and we've built an Instant Decision Lending platform, which is pretty unique in small business lending to be able to assess the credit risk of a small business both from prime to slightly riskier businesses. And so what -- we don't believe that anyone is offering a effectively a buy now pay later product for small business customers, nor do we believe anyone could offer it as well as we are able to because of the deep understanding we have of small business borrowers. We think lots of people can do it for consumer lending. But for small business lending, you need this very deep expertise that we have, and frankly, the technology platform to be able to do it. So we feel we've got a lot to add in the space, and that's why we've gone into that part of the market. We also, as Lisa talked about, feel that it is additive to our strategy, which is -- and our mission, which is to build a place where small businesses can get the funding they need to win. And it will strengthen our long-term loan product as well as providing large incremental growth opportunities. So we think it's a very attractive area for us to expand into. We don't think anyone else is really doing what we're doing. We haven't really found anyone doing this. And frankly, we don't think anyone can do it better than us.

Our next question will come from Vivek Raja of Shore Capital.

I had a couple of questions, please. The first one is about the automation in lending decisions. You're up to 60% and your target is 80%. I appreciate that's a long-term target. I just wondered if I could invite you to just when you think you might get there. And crucially, with respect to that, what is the cost efficiency uplift potential from that move? And I wonder if possible, I know there are a lot of moving parts, but just take us through the sort of economics of what that could do to operating leverage. And then the second question was relating to Slide 40. Just looking at projected annualized returns for the U.K. and the U.S. I just wondered if you could just take us through the moving parts of the step-up in returns between the 2020 cohort and 2021 cohort in the U.K. and the opposite in the U.S. and why the U.S. returns have come down. Just the moving parts that I just explained.

So thank you for the questions. I'll take the first one and then hand over to Oliver for the second. In terms of the automation target, as you can see, we've made really good progress. We're now at 60% of loans getting an Instant Decision on the platform. We were at 50% at the end of the year. We were at 40% 6 months before that. And we are in the process now of migrating more segments onto this technology platform, which will increase the percentage further over the course of the second half. It's difficult to say exactly where we're going to get to at this point because it's quite early. But we feel very good about reaching the 80% long-term target, might be sooner, but more likely, it will take us a little bit of time. It's a long-term target after all. In terms of what that gives to us, I think we've shown in the presentation that there are a number of benefits even beyond just cost, to be honest. We find that borrowers that get an instant decision are up to 25% more likely to convert into taking a loan. I mean this is just -- we just live in an instant gratification society. People want things now. If you give them something instantly, they're more likely to take it. And this is so unique in small business lending that -- and these even very good customers are so time precious that this just really helps them get on and run their business. We see the credit performance being the same. And clearly, the other big, massive advantages that this technology allows us to go into shorter-term products like FlexiPay, like the card product, which frankly, we couldn't do unless we were operating such a highly automated platform. In terms of the unit economics, I mean, we haven't discussed that in detail. But at some point, it's something we can break out. But the simple way to think about it on the cost side is we were able to grow our U.K. originations 109% year-on-year without adding any additional headcount. So we will still have the usual -- some usual variable costs in terms of credit data in terms of marketing costs, things like that. But in terms of people needed to actually process the incremental loan volume, that shouldn't have to rise materially. And that's the key way that this drives operating leverage going forward on the incremental marginal loans that we do and that we're excited about.

Okay. And in terms of the returns, which are on both Page 40 and also Page 13. So these returns reflect the actual returns delivered to an investor and those projected future returns, which is why on Page 40, the range in the older cohorts is a lot narrower because most of the money has been returned compared to the new ones where it's a wider range. Page 13, we demonstrated that as we've been through the pandemic, we've got more confident in the borrower behavior, which has proven remarkably resilient. And therefore, we've reevaluated upwards our view of what the likely investor returns are. And I'm very, very proud and happy to say that even for those cohorts most affected by the pandemic, we're still returning 2% plus, which again, I think, proves the resilience of the asset class that we've created and that we're offering to our investor partners. Page 40 has that expressed more of a range, recognizing that we're not perfect seeing into the future. I wasn't sure if your question was any more precise, Vivek. Is there anything particular you want me to talk more about on here?

Yes. I guess what I was asking you, Oliver, was as the projections change between cohorts, what is changing your thinking? Is it the cost of credit? Or is it the revenue yield? And if it's the revenue yield in the U.S., is that because of the switch from government guaranteed toward commercial. That's what I was asking, really.

Okay. So the U.S. on 2020 and 2021, particularly 2021, it is a unique loan, and that's the PPP loan, and that has a number of unique characteristics. We talked about forgiveness earlier. It's also a very low interest rate, but because it's forgiven it's effectively virtually guaranteed. So the U.S. loans for '20 and '21 shouldn't be seen as an indication of our typical go-forward loan yield and loan performance. Generally, the earlier cohorts were written a long time before the pandemic hit. A lot of the principal and interest has been repaid in advance of that. The 2018, 2019 loans are most exposed to the pandemic just because most of the balances were still there, although they are amortized down over time. And they're the ones that therefore have bounced back most as the borrowers have come through this period so well. Going forward, I would expect our typical returns to be back in this 5% or so range. And I think we talked about earlier, both through the government lending schemes and also now in the return to core, we've had no shortage of investors willing to partner with us to provide funding for these loans.

We will take our next question from Orson Rout of Barclays.

Congratulations on the strong results and the exciting product launches. So just a couple of questions from me. First of all, by region, can you give us a better idea how to think about H2? So sequentially originations in the U.K., of course, went back in H1 versus H2 last year. while the U.S. increased sequentially, but were still below the strong H1 2020 levels. What has the sequential trend in H2 been thus far? And are you seeing the anticipated slowdown equally in both regions? Or is there some divergence between the U.K. and the U.S.? Then maybe to stay on regions. How do you view the new product launches from a geographical perspective? The buy now pay later product and Charge Card both seem to be U.K. only at this moment, by looking at the website. Are there any plans to also expand these new products into the U.S.? Or will this come at a later stage? And then maybe after that, I'll have a follow-up.

First question, if that's okay. So we're seeing a similar pattern in both the U.K. and the U.S. in the sense of a transition moving away from government schemes, some degree of borrower prudence and caution or waiting for the economies to really open up and accelerate. So the sort of dip we talked about we're seeing in both markets.

And just in terms of the FlexiPay question, actually, Lisa, do you want to take that one?

Yes. I mean we're seeing, as you say, we're seeing good traction so far in the U.K. And we're -- it's very early days. We're prudently rolling out this new product with a beta test to start with, with our existing customers. I do think there is opportunity over time in other markets, but that will come in due course as we ramp up initially in the U.K.

Okay. That's helpful. And then maybe one last one. Just looking a bit further. Although it's probably a bit too early to comment on income into 2020. But I thought we could be about profitability. You did mention that you expect to be profitable going forward. So just looking out into 2022, given that outlook for income is still somewhat uncertain, will you be managing costs to remain profitable, if necessary? Or is growth still the main priority to Funding Circle?

What we have said is that we will be adjusted EBITDA profitable going forward, and we're still confident we could be that. Equally, we've also said we will take advantage of growth opportunities as they come. I think it's a bit early given some of the uncertainty we've talked about to talk too much about 2022 at this stage.

We have no further telephone questions at this time. I will now hand over to David for questions from the webcast.

Thank you very much. And I'm conscious of time. We are running a little bit over today, but I think we've got time to take one from Jack Barrett at Mann. Can you comment on how management thinks about the right level of investment in growth opportunity versus growth EBITDA going forwards? Should we be assuming it will be running at a low level of positive EBITDA for the next few years?

I think we've -- well, as we said, we will be EBITDA profitable going forward. Yes, we will also take advantage of growth opportunities as they present themselves. And clearly, we have some exciting opportunities. We've spoken about the attractiveness of the U.S., and we've spoken a lot about the attractiveness of our new products in the U.K. and then potentially the U.S. Whatever we will do to take opportunities, we will be disciplined in that. And I think Samir may also have mentioned the beauty of the Instant Decision Lending technology we built is it is deployable from our core product into FlexiPay and some of the new products. So it's not a whole de novo investment build. It's the application of technologies and capabilities we've already built.

Thank you, Oliver. And that brings us to the end of today's presentation. Thank you to everyone for joining. Have a good rest of the day. And if you have any follow-up questions, please feel free to get in touch via the IR contact details. Thank you.

This concludes today's conference call. Thank you all for your participation. You may now disconnect.