In a number of cities around the world, housing affordability is getting out of control. Hong Kong, Sydney, Vancouver and Auckland are regularly cited by the IMF as examples where the price-to-income ratio has reached dangerous heights. In my home town, Sydney, the average price is over 12 times earnings (A$84,600 v A$1,032,000) which is causing so much concern it has become a social crisis.
Governments are increasingly being forced to act, enforcing lending restrictions, removing investor tax breaks and looking at ways to increase supply. Now tech entrepreneurs are spotting the opportunity, with a handful of PropTech platforms launching to help first home buyers get into the market. Stepladder is a UK-based one, inspired by the South American system called ROSCAs where people pool their money so they can buy sooner. It’s a simple concept – 10 people each contribute 10% of their overall saving target each month. Each month the group generates 100% of a deposit for one of the people, allowing them to buy immediately. In this way, 9/10 people will get their deposit faster than they would had they been saving alone.
Founder Matthew Addison tells us his story:
While ROSCAs provided the inspiration, what was the moment you decided to create a business?
You’re right to point out that the seed for StepLadder was planted during my Master’s work at the University of Pennsylvania. If you spend time reading my thesis, you can see I was fascinated by ROSCAs, and in particular, the commercial scale opportunity in markets where these are absent.
The rains that helped the seed sprout were a near-continuous flood of press focused on the Generation Rent crisis. In the UK in 1981, 62% of 24-35 year olds owned their own home. Twenty years later, that figure was still 60%. But, by 2014, home ownership in the traditional first time buyer demographic cratered to only 36%.
I thought a disruptive private sector solution – importing a solution to this local problem – could make a difference. We know ROSCAs work – 70 countries worldwide have their own local names for them. I understand economically why they are an equilibrium solution to a particular market dynamic, which is present in the UK first time buyer market. Finally, I have the career-long financial sector expertise, product knowledge, and entrepreneurial sense of mission to bring ROSCAs across the chasm to the UK, and beyond.
What was the process of launching the platform – funding, programming, business planning, etc?
StepLadder’s history to March 2017 can be broken down into three phases: (1) due diligence and formulation; (2) structuring and funding; (3) launch and proof of concept.
First, the formulation of a ‘first time buyer solution’ business model around the core ROSCA intellectual property required understanding the market and testing that the market would be able to understand the StepLadder proposition. Focus groups and due diligence of the first time buyer marketplace were crucial at this stage.
Second, the detailed design of the StepLadder circle was both an iterative exercise based on market feedback and one where expert advice proved invaluable. We closely examined multiple dimensions for assembling the business plan: e.g. regulatory, legal, branding, and underwriting. We also secured the financial support of our ‘Proof of Concept’ investors.
Third, we entered the Proof of Concept stage when the “shop window” that is our site: joinStepLadder.com went live in November 2016. From this point, our focus has been marketing awareness and information exchange with prospective members.
How do you calculate the 45% savings? Presumably some people will get the money sooner, but some might get it later?
Mathematically, the expected draw from a uniform distribution is 50% of the draws remaining. That roughly represents the odds of an individual member being drawn for the property deposit in any given month. It is imperative to appreciate that even being drawn in the final period of the circle is no different to the alternative outcome of saving alone (except for minimal interest in a regulated, principal-guaranteed, high-street savings offering). Where a member in a 30-month StepLadder circle has a 1/30 chance of having to wait the full 2.5years, saving alone that probability is 100% — the lone saver will definitely have to wait that long!
Do you put the money in savings and does the system require the money to earn interest?
The fixed monthly contributions of members become the principal for the peer-to-peer lending underway. In other words, float is minimal. This is not a collective investment scheme, nor does it involve ‘investment returns’. Just the opposite – the power of the ROSCA is in the acceleration of capital formation for actual member use in making an asset purchase.
What is your business model?
We generate revenue from membership fees, mortgage facilitation, and transaction services. We intend for the membership fee to recoup administrative costs of operating the circle – and not as a source of profit for StepLadder.
Please note that the fixed monthly contributions that form the property deposit awards are always treated as client funds and are ring-fenced from StepLadder’s own operating resources.
Do people need to use the agents/advisors that pay you fees?
No, members are not tied to our transaction services partners. However, we believe our service partners will make attractive offers to our members. This is based on two, reinforcing factors: 1) group buying discounts and 2) quality referrals from our membership. We have evidence of this already in the promotions offered to Founder’s Circle members by our initial panel of services partners.
What are your plans for growth / can you take this abroad?
Thanks for the optimism! At the same time, our key focus is executing on delivery of our roll-out: first in Greater London and then throughout London and the UK is an unmatched global opportunity in scale, innovation, and urgency.
Medium-term, we also think there is a significant opportunity throughout the Anglo sphere (Ireland, Canada, Australia, and the US) and beyond. We are open to partnerships in order to accelerate this process.
Are there any other platforms in the UK or globally helping with this affordability issue?
There are a number of well-intentioned government programs aimed at this issue: shared ownership and Help-to-Buy ISAs in the UK, for example. Generally, these come with a number of conditions or restrictions. They are also subject to the vagaries of political priority.
There are also a number of deposit-finance schemes on offer from new and specialist lenders. I note that these can introduce tax, estate, and financing complexity to home ownership, which is not the case with StepLadder.
Ultimately, the real alternative is the Bank of Mom and Dad – but that’s not an option available to every qualified first time buyer. StepLadder is.
What is the technology behind the platform?
The platform has two main pieces (i) the public facing website and matching engine; and (ii) the private member environment with circle management.
The public facing site serves to facilitate the information exchange process and accelerate the match of a prospective member to a circle that fits their circumstances and goals. We have natural network effects as our pool of prospective members grows – this means matches occur faster while simultaneously our circle affinity scores rise. This is always done without sacrificing underwriting standards and why the first criteria remain credit and affordability tests.
In the private member environment, the functionality is focused on managing the circles’ progress, reporting and user-circle interaction. The whole circle management process is automated, including all cash flows and allocation. The UX is a simplified version of a marketplace lender interface, where we prioritise security, transparency, and community among the members of each circle.
Have you needed to jump any regulatory hurdles?
Absolutely. I have engaged with the Financial Conduct Authority since before incorporating StepLadder in March 2016. The first port of call in January 2016 was the FCA’s Innovation Hub. They have been great. Our ongoing dialogue with them culminated in a preliminary perimeter assessment that StepLadder’s business model conformed to Article 36H of the Regulated Activities Order – operating an electronic peer-to-peer platform.
I considered regulatory review so important from the outset that I retained both corporate counsel and regulatory consultancy before raising seed finance or bringing on any team members.
What do you think is the biggest concern someone might have in using the system?
That’s as easy to answer as it is important: trust. We are a new company offering an unfamiliar financial product. Moreover, our proposition is large ticket with a long(-ish) duration. We see ourselves as a path across a generational rift; however, that may sound too good to be true to a casual observer.
So, it’s StepLadder’s responsibility to earn trust. We started by thinking like a prospective member. Focus groups were among the first business activity we undertook, and we clocked-in nearly a dozen before putting up our first landing website. I consider 1:1 direct personal contact with prospective members essential to members deciding StepLadder is a suitable solution. I personally feel compelled to evangelize our message – so, I’m happy to engage with press, partners, and thought leaders about what StepLadder can do.