LendIt - Consumer P2P lending - Lending Works, Zopa & Ratesetter
Lending Works' CEO, Nick Harding, was invited to the panel at LendIt Europe to discuss innovation in consumer peer to peer lending.
Other panel members are:
- Giles Andrews, CEO of Zopa
- Peter Behrens, Co-Founder of Ratesetter
- Simon Champ, CEO of P2P Global Investments
Please click below:
PR:Peter Renton, Lend Academy
SC:Simon Champ, P2P Capital Solutions
GA:Giles Andrews, Zopa
PB:Peter Behrens, RateSetter
NH:Nicholas Harding, Lending Works
H:Hamish – audience member (Q&A)
F:Female audience member (Q&A)
PR:Time for our first panel of the day, we have the UK Consumer Peer-to-Peer Lending panel, it’s going to be moderated by Simon Champ and over to you guys.
SC:My name’s Simon Champ, I’m the CEO of Eaglewood Europe which is the manager, external manager of the world’s first listed investment fund that is dedicated to investing in peer-to-peer lending. [Inaudible 00:00:39] is listed on the London Stock Exchange as [inaudible 00:00:43] alluded to earlier, and we’ve already commenced lending, and we lend, or we put our capital to work in both consumer lending which we’re going to discuss in a second, but SME and trade finance, supporting the whole peer-to-peer industry. As a lender, therefore, or as a buyer of loans from peer-to-peer platforms let’s talk about the whole sort of consumer space here, we’ve obviously got two of the, if you like the Barcelona and Real Madrid of the consumer lending space and then probably Atletico Madrid, the young sort of upcoming Turk so I think we’ve got a nice sort of dynamic. Two of you guys that, that the older guys started out with retail capital, institutions like mine have come along, want to play a role, I think that probably potentially creates conflicts and I’d be very interested and I’ll start with you Peter in how you see the management if you like of institutional capital alongside retail capital?
PB:I think institution capital obviously offers an enormous opportunity for these platforms to scale over time, and I think that’s been demonstrated in the States very dramatically and it’s starting to be demonstrated here. I think that, you know, at RateSetter we are very interested in the consumer and the retail money and protecting them, and I think that it would be very easy to sit here and talk about precise percentages that we’d like to allocate to institutional and retail and so that the perfect split was 65/35 or something like that, but I think that what we really need to do is build these markets deep enough that they’re big enough for everybody to come, it’s an open market, and people can just compete on price for the amount they want to put to work.
SC:And Giles, do you think there are negatives of institutional capital that might impact retail and managing that is, managing the message to the retail investor is a challenge?
GA:I think there are challenges and there sort of is a perfect split, it might be idealistic to ask for it, but the perfect split is every pound of retail supply is lent, and institutions act as a buffer to allow us to grow more speedily. I mean as a retail dominated business like Pete’s we tend to grow our retail base organically, so by recommendation and word of mouth, we don’t tend to grow our retail base by marketing. So it’s a very hard channel to sort of turn a dial up, and it’s easier to influence demand on the borrower side, so institutional capital is a terrific opportunity to allow us to manage that buffer between a lagging retail growth potentially and a more extreme, or faster borrow growth. But that does present challenges, and therefore the quality of the relationship with institutional partners is absolutely critical because clearly they don’t want to be seen as a lender of last resort, or as a, to use my language a buffer. And I think we can work with them effectively over time to build that quality of a relationship.
SC:Well I think that’s one of the issues, I guess retail capital is often small, fragmented, institutional capital comes along and to get involved it needs to deploy scale very very quickly which must create a challenge on your platform?
GA:Yeah, I think it does and I think we’re pretty confident we can learn to manage that, manage that supply.
SC:And Nick, obviously you represent Lending Works which is, you know, a new up and coming exciting platform, you haven’t sort of been slaving away for eight and six, five years with retail as Peter and Giles have, how do you view institutional capital and how are you going to manage it.
NH:Well yeah, first of all I’m really glad you didn’t compare us to Shrewsbury Town at the beginning which [all laugh] I was slightly worried about, but we are actively pursuing a number of institutional lending opportunities and so if you are an institutional lender please get in touch, we don’t currently have any institutional lenders operating through our platform but much like Giles mentioned we believe the potential to smooth out that growth curve is huge and we are actively pursuing that. That I think a very important note that Peter made is that we are 100% focused on our consumer lenders, the retail market, we’re here, we’re doing this because of the retail market, many of our employees, me included, used to work for a traditional financial institution and we’re here to offer that service to consumers. So whilst institutional lending capital is absolutely something we’re interested in we also want to protect the consumer.
SC:I certainly think as speaking from institutional capital perspective there are many things we can do as a capital provider, not just provide capital, but provide our insights to the platforms to help create a weld, because a bond, because together we’re trying to essentially create a better product than the banks, is there anything Peter you’d like to see institutional capital do that would make your life easier and make, if you like create a better bond?
PB:It’s quite an interesting question Simon [all laugh].
PB:Yeah [all laugh], I think institutional money has… there are different types of institutional money around and I think that the holy grail for these platforms is to get to a place where the institutions are just putting in their money by pressing the same button that the consumer is. Institutions by definition and understandably given the way they’re engaging in the process, generally requires some form of dialogue, and whilst I entirely understand you want to have a dialogue, I enjoy talking to you Simon [all laugh], it’d be great if we can get to a place where they just press the same buttons, and it just…
SC:And it’s effectively all the same, I guess like the equity market is today.
SC:Institutions and private individuals co-exist, yes.
SC:And I’ll ask actually the same question of you Giles [laughs].
GA:Well it was a pretty good answer probably [all laugh], and I think there’s a big distinction between types of institutional capital as well, I think what you saw in the States particularly was the initial early institutional investors tended to be pretty short-term providers of capital, and arguably that was because the American platforms didn’t have a choice, so they didn’t have the same retail franchise that we have in the UK, and therefore that was the best source of capital they could find, and I think you’re seeing them over time migrate towards longer-term sources of capital, and I know one of your big pictures has always been a long-term source of capital, and I think that that’s important because that allows platforms to build sensibly for the future, rather than worrying about an investor who’s on one day and potentially could be off the following.
SC:Yeah, I think well obviously from my perspective that that is the point of institutional capital, to provide a solution to one half of your daily equation, you know, where to find the lending capital from with great visibility. Let’s change subject because all three of the consumer platforms offer the retail investor some form of insurance product and I think Nick’s had the benefit probably of seeing RateSetter initiate and Zopa develop these insurance type policies. Nick, perhaps you can explain to the room how yours works and how you see it benefiting the retail investor?
NH:Yeah, absolutely, so when we were designing our business we focused in two things, and one of them was protecting our lenders and the other one was paying them a great return, so we put our heads together and thought how can we protect our lenders the best, and one of those was I think what RateSetter did with their provision fund is a fantastic innovation in peer-to-peer lending.
SC:And Peter, when you initiated the insurance product, is it something, I mean it’s now sort of embedded in the product, the consumer doesn’t necessarily get a choice, did you think it’s a, it makes a discernible difference to the product?
PB:Yeah, I think it’s absolutely fundamental, I think that our view of the world was that the man on the street does not understand credit risk, or more importantly doesn’t have the time to understand credit risk, so asking somebody whilst they’re having their breakfast and eating a bowl of cornflakes to decide they want to go for a credit grade B today or a credit grade D today is too complicated. So we’re just trying to simplify it and make it a proper consumer, easier consumer journey.
SC:So all three of your businesses are… when you compare to the US, to a consumer platform like LendingClub that goes a long way up the risk curve, goes A, B, C, D, E, F, G, all the way to… and lends to people at 28%, 29%, in the UK we have a more sort of savings feel around our product I think, a more, possibly a more conservative outlook generally and how do you feel Giles about that curve and expanding up that curve and offering loans at those kind of rates off a peer-to-peer platform?
GA:So the important point is the net returns, so the net after losses return, and I think over time we all learn a little bit more about risk management and we learn potentially to take slightly greater risk in order to provide greater returns, and I mean I think our view of these funds is slightly different, so I think there’s not a lot of evidence that our consumers actually like it, I think a big chunk of them would very happily trade the fund for a higher return on the basis that they understand that every level of financial intermediation carries a cost and this is no different, so it is a level of financial intermediation. We over fund it, therefore it is a cost to the system which many would rather do without, however it does solve the tax problem, so I don’t know whether many investors appreciate, but you know, wouldn’t apply to institutional lenders, but retail lenders can’t offset the costs of bad debt against their gains, so therefore to receive interest gross and pay tax on that gross number, and then suffer losses, is quite a distortion if you like of the market, and the benefit of a fund is it allows you to pay the return net of tax, that may disappear, I wouldn’t hold my breath but it may disappear.
SC:Do you get the feeling it… I mean that was discussed probably a year ago that it may disappear and I’ve heard little on it since.
GA:And I think there’s been a bit more noise about it recently than there was in the past, but I’ve learnt not to hold my breath when [all laugh] discussing these things, I think, I mean there’s a head of steam behind the conversation but it’s a question of priorities as always with government.
SC:And Nick, do you think a peer-to-peer platform can deal with low risk investors and high risk investors at the same time, off the same, giving out the same message, the same brand?
NH:I absolutely think they can, I think Peter made an interesting point about that, that level of simplicity, and we very much built our brand and our company around providing a simple system, a simple and transparent platform and we’re focusing on the doctors in York and the builders in Wales, and all of these people, not just the people inside the M25, and so I 100% agree that a lot of these people, whilst I’m sure they could understand some credit risk they’re just not interested in doing that. So providing that very very simple approach to our retail, our consumer lenders is something we’re focused on, we are exploring the opportunity as we talked about a moment about of institutional lending capital, so a more sophisticated class of lending capital. And then maybe somewhere in-between, so there are a lot of opportunities ahead of us, I think with ISAs coming, I think something we might talk about in a moment, with ISAs coming of course it’s important we have that simple approach nailed because the ISA capital is almost certainly going to be more retail again, you know, more consumer focused again.
SC:So we’ll talk about ISAs in two seconds ‘cause I think it’s a very important potential development for the individual, but before I do, Pete, I cycled to work last week and I cycled through Shepherd’s Bush, around the big island at Westfield, and there is a massive RateSetter sort of glowing neon sign, you know, quite an innovative sort of retail campaign, how’s that, how do you think that kind of communication is going to work out for you and do you think that that is a necessary step to raise awareness?
PB:I think it’s an absolutely fundamental step to raise awareness, I think that it has been a very interesting and successful campaign for us, and has raised awareness enormously, and we are, I mean I think the time has come for this industry to stick its head above the parapet and start trying to raise the awareness, you know, [inaudible 00:14:27] stood up and pointed to some interesting numbers which showed that basically nobody’s ever heard of peer-to-peer lending. And I think the only way to get people to hear about you is to advertise, and advertising is an absolutely terrifying thing if you run a business and writing cheques is very very sort of, you know, traumatic. But it is the way to get out there and do it, you’ve got to do it.
SC:Traumatic, indeed, yes, I think that’s right. So like well let’s touch on ISAs, I mean firstly the name Individual Savings Account, S, Savings, that’s quite a big, it’s the original sort of idea of the ISA was to create a savings product that was tax efficient for retail consumers, do you think peer-to-peer lending Giles is appropriate as a savings product?
GA:Well I think there are two questions to answer there, so first of all you can buy stocks and shares in individual savings accounts, and I very firmly believe that our asset class is lower risk, more predictable and safer than investing in stocks and shares, so that’s my first answer. And secondly, sorry, our asset class is appropriate for ISAs, is our product savings account, no it’s not, but I think that’s a very, you know, using a very narrow definition of bank deposits that are government guaranteed with no risk beyond total financial meltdown and governments not being able to bail out banks, or choosing not to perhaps. That we can’t and shouldn’t be compared with that.
SC:No, and Peter, obviously George Osborne and then HM Treasury have both indicated [distracted with phone ringing], have both indicated that they would like to see peer-to-peer included in ISAs somewhere and my gut feel is they’ve said it and then now they’re working out actually how to do it and it’s not as easy as it sounds. Where do you feel this is going to pan out, do you think we’ll see funds, do you think we’ll see platforms running their own ISAs?
PB:I think as you say they’ve said it and then they’ve sort of thrown the problem to other people to sort out and the other people are busily trying to sort it out, I think they’ve actually got quite a lot of clarity and they are getting there, and I think ultimately the platforms will end up becoming ISA managers, and I think, you know, all of our customers are busily emailing saying, “Can we do it tomorrow please?” and the answer to that is, “I’m afraid not, it takes a little bit more time,” everything involving government takes a bit more time which is not to be rude, these are quite complicated weighty things they’re trying to achieve. And I think that it is incredibly exciting for the industry and the UK, and a massive opportunity for us.
SC:Yeah, I agree, I think great opportunity for you, great opportunity potentially for asset managers like us to create vehicles that are ISA-able. Nick, I think the one slightly frightening thing about ISAs, I think £57 billion went into ISAs last year, it’s a huge amount of money of which 45 odd, so almost three quarters went into cash ISAs and this kind of product looks quite cash ISA like, and how on earth is a platform like yours going to cope with £45 billion worth of applications?
NH:Well that’s a really good question Simon, so there’s two things we’re focusing on at Lending Works, as regard preparing for ISAs, and so the first is all about scale, and so the businesses that these gentleman have founded are fantastic businesses that are turning over £30 million a month, we’re turning over roughly £1 million a month at the moment, so a fraction of the size, but we’re not here to make up the numbers and we absolutely have sights on being the largest peer-to-peer lender in the UK and I hope to give these guys some competition along the way. So…
SC:I think Real did win the league didn’t they once?
NH:[All laugh] Shrewsbury Town haven’t though [all laugh]. So the first point is gaining scale and so we’re looking for many partners, we’re looking for lots of different ways of gaining scale, as quickly as possible, but as safely as possible, and then the second point is how we become an ISA manager, how we manage that process. One of the members of our team actually used to run the ISA division for Nationwide for a little while and in January they employed 100 members of staff every year and then 90 of them were let go every April, it was just a cycle that they had to fulfil, how can little old Lending Works deal with that at this stage. So we are surveying a number of opportunities, so we’re looking at becoming an ISA manager ourselves of course, but again partnerships, you know, using the facilities and resources that a large scale partner already has is something that we’re interested in as well.
SC:Okay, let’s talk about disclosure, let’s talk a little bit about how much the lender knows about the borrower, and I think this is a, you know, this is effectively all three of you run pooled products where the lender lends into a… actually gets a blended return, slightly different to the US on LendingClub where you can potentially pick individuals to lend to, Peter, how do you think, or what kind of levels of disclosure do you think the lender is entitled to about the borrower and what kind of direction do you think that’s going in?
PB:I think entitled to is an interesting thing, I think the question is is how much does the lender want, and I think it’s rather than what they’re entitled to, I think that, you know, there’s obviously plenty of data protection limits on what one can give them, I think what’s very important is to allow the lender to know what the risk they’re taking is, and I think that we are actually very focused on making RateSetter more transparent which sounds a very easy, cheesy thing to sit up here and say. But I think that our business has grown over the last six, 12 months in a way that has made it much more of a multi-asset platform than just a consumer focused platform. And I think we’ve changed the way we describe what we do on our new website, and I think that’s a process we want to go further with and it’s about articulating that message more clearly to our lenders.
SC:Is that because you think there are more lending opportunities outside consumer, just consumer?
PB:It is because our business has grown in a way that we see our role as aggregating the lenders’ money and finding risk appropriate returns for those people, and I think that we have been approached by various instances over the last couple of years of people that we have found a way to work with whilst making sure that we are doing it in a sensible fashion.
SC:Giles, how do you see disclosure at Zopa and how do you think the industry’s going to develop, or actually more importantly how do you think Zopa’s going to develop in terms of disclosure and does, effectively does your lender get the right degree of disclosure?
GA:Well the first thing I’d like to say is that I’m giving a keynote this afternoon and this is going to be a major topic of it so I’m not actually going to say very much of it now so I’d encourage anyone who wants to hear the answer to this question maybe to wait until three o’clock this afternoon. But in principle I would use the word entitled, I think the lender is entitled to every piece of information about the borrower that data protection permits and I think that’s a way to build confidence in the platforms, and I think transparency is critical, and I will expand later [all laugh]
SC:We look forward to that. And Nick, how’s Lending Works going to deal with disclosure?
NH:Yeah, so we have actually already reacted to customer feedback on this point, and so some of our customers asked for more disclosure so we, it took us a couple of months to do it but we built some systems to be able to do that and we will react in that way to what our customers request, you know, provided obviously it’s conforming with data protection. But we see the idea and the wonderful thing about peer-to-peer lending is the fact that you have these direct relationships between counterparties and so to give information around those relationships is absolutely in our business model.
SC:Okay, I think this session runs till half past so we’ve got sort of ten minutes left so I’m going to ask two more questions, then if anybody would like to throw in a question after that’s great. Peter, you’ve recently signed a deal with a partner that drives borrowing to you, Giffgaff which is a mobile phone sort of type of intermediary, how important do you think partnering is going to be, bearing in mind your big advertisement outside Westfield, that’s one way of finding lenders, how do you think partnerships will develop in terms of finding both borrowers and lenders I guess?
PB:I think it’s just an interesting space and an interesting opportunity and I think that we get phone calls from lunatics who think there’s no way we’re going to do anything, and we get phone calls from interesting sensible people, if we get phone calls from interesting sensible people we’ll try and work out how to do something. But the nuts and bolts of these platforms are about efficiency, they’re about creating one thing that works and repeats, and so getting overly bogged down in trying to do too many crazy whacky things is not the way to create a very effective machine like process, which is where the value comes in these platforms I think.
SC:So effectively relationships are great, as long as they can be homogenised, is that a word [laughs]?
PB:Yes, exactly, it’s about repeatability I think, you know, so rather than creating endlessly complicated bespoke things that are very hard to reiterate.
SC:And Nick, for you, sort of starting, you know, newish, do you go out and mass market to retail or do you try and create relationships where someone else has a retail footprint?
NH:Yeah, well 2015 for us is absolutely the year of the partnership, so we are focusing on that in a big way, 2014 has been about proving our systems and our platform which has been really successful, and for us I fully take onboard what Peter’s saying, and taking our core product and repeating that in many different ways with many different partners is our aspiration. We don’t have the resources to build a brand such as TSB or NatWest are doing at the moment, and so we’ll leave brand building until we do have those resources, but at this stage it’s working with other partners who can help us get to that point.
SC:And Giles, obviously Zopa’s had the retail borrower at its heart since its inception, how do maybe wholesale relationships sit with a platform with your kind of if you like ethics?
GA:I think you have to view them in the context of intermediation, and the cost associated with them, so the end of the day the cost of borrower acquisition is an important part of the cost of intermediation that we have to bear, and there’s no doubt that working with some partners leads to efficiencies and lower cost of acquisition or equal cost of acquisition but at higher scale and that’s terrifically interesting. There are other sorts of partners that add significantly to the cost of intermediation and I’m aware of those.
SC:And how do you feel, I mean it’s happened in the US, we’ve begun to see leverage come into the United States on, certainly one LendingClub and Prosper as institutional partners partnering with leverage providers to bring a greater weight of capital, that obviously has, comes at a price, Giles, you know, how do you think we’re going to develop going forwards and obviously this is a subject very close to both of your hearts right now.
GA:Yeah, more real-time negotiation [all laugh]. I mean I think the really interesting thing about the leverage conversations are that they are a sign of the industry growing up, and a sign that significant players believe that we have the right infrastructure in place, and importantly the right quality of asset that allows them to lever that asset. So I think it’s a terrifically exciting development, it’s also kind of a scary development.
SC:It is, yes, yes. Peter, do you think RateSetter can sort of deal with leverage or if you like capital providers that bring leverage?
PB:Yeah, I think so, I mean look I think Giles has said it, it’s an incredibly strong endorsement that there’s plenty of people out there that think that what we’re doing is sensible and those are people that are prepared to put their money where their mouth is. So yeah, I mean I think we are becoming accepted by the broader financial institute which goes back to [inaudible 00:27:02] point earlier, that this is about the various parts of the financial ecosystem coming together.
NH:Yeah, we won’t be securitising until we have some institutional lenders I suppose, so our first point is getting those institutional lenders onto the platform.
SC:And we’ve seen, again George Osborne announce probably more directed at SME lending, talking about when large banks don’t offer a loan to a small business, it’s going to encourage them to refer that onto a panel of lenders like Funding Circle and Assetz Capital, and probably some other challenger banks, do you think we’ll ever see the same in consumer, do you think the Treasury cares about the consumer borrower as much as he cares about the SME borrower?
NH:I think there’s a really interesting stat that came out with Nesta last week, which was that something like 70 or 80% of the loans going through our platforms haven’t been declined by a bank, in fact they haven’t even gone to a bank, they’ve come directly to us. And so there’s fundamentally a difference in the way that’s working, so unless a bank potentially was going to pass leads to us that they didn’t want to write because for example they don’t have a current account with that said bank, then that potentially could work. But if it’s going to be decline traffic I’d suggest it’s probably the wrong sort of traffic for us.
GA:I mean we already deal with some bank declines through various intermediary channels that we talked about before, but I think there are two big differences between SME lending, so 1) I don’t think there is the level of political zeitgeist around consumer lending as there is around SME lending, and by the way I think that’s entirely correct as well, so I don’t think there’ll be political pressure on it to happen. Also I think it’s harder for a bank to admit that it can’t service a consumer loan that a platform can, because that speaks to just something wrong with their process, it’s not that difficult to admit that they can’t quite organise themselves to lend £100,000, £200,000 to a reasonable quality SME, when an efficient platform can, that’s an easier thing for a bank to admit and I think you’ll see more of the Santander type deals and I applaud them.
SC:And Peter, if as we all hope, if consumer peer-to-peer lending really really grabs, you know, takes hold of the heartland of Britain, how do you think the banks will react, what do you think they will do to try and win back their retail borrower?
PB:I think that the first thing they’ll think is they haven’t lost their retail borrower, you know, when if you look at the funds flow on any of these platforms, the money starts with a lender who’s got an account at NatWest, he then puts it into RateSetter which happens to hold its money with Barclays who then lend it to somebody with an account at Santander, I think it depends how… my view is that banks are ultimately going to see themselves in a much more utilitarian way, this is about keeping control of that money flow, it’s going to be the thing that is going to exercise them. You know, when Apple and Facebook start doing all our payments and, you know, we give up on the banking infrastructure, that’s when they’re going to start getting a bit more exercised, but I think as long as the money is shuttling around their system I think who makes the handshake of that loan is less of a concern to them.
SC:Okay, we’ve probably got five minutes left, have we got time for maybe one or two questions if anybody wants to ask our panellists a question?
H:Thank you, Hamish [inaudible 00:30:20] investor, Zopa currently has a lending rate guarantee in place, if we fast forward to when P2P is ISA-able, how would you see an ISA [inaudible 00:30:31] impacting lending rates and do you think that lending rate subsidy is sustainable?
GA:So two questions then in that, I think it’s a very big imponderable as to what will happen to lending rates when ISAs come in and it’s actually quite imponderable how much supply of money will come in, but I think as has been mentioned in several presentations this morning it does represent a challenge, ultimately the rates that we pay our borrowers, pay our lenders rather, are set more by our borrowers than anything else, so the marketplace that we are competing with is a marketplace of loans, of which as an industry we’ve got about 2% or 3% market share, so that is the biggest driver and determinant of price in my view. As far as subsidy goes, I mean I don’t think… the subsidy doesn’t really cost us anything, it’s more around protecting the volatility that otherwise lenders might suffer and we’re working very hard to remove that volatility, and at such point that we do remove that volatility then the need for subsidy should disappear.
F:How does that work, how does the subsidy not cost you anything?
GA:I think it’s a question… if I heard you right, it’s a question of significance, so we’re protecting against a volatility of return, so we did it over a basket of loans, some of which fall above the rate that we issue, and some of which fall below. So therefore the ones that cost us money, there’s a sort of adverse selection if you like that they currently cost us money to bring them up to the mean, at the point where there’s no volatility then the cost disappears.
SC:Okay, I’m just going to bring the session to a close with one short question to each of the guys, I just want one prediction for next year from each of you about the shape of the industry in 12 months’ time.
PB:Bigger, [laughs], I… one prediction is more, much greater involvement of the big banks, I think by this time next year we will see… I know Santander and Funding Circle have got something interesting going on, but I think that in 12 months’ time our high street banks will have engaged their brains more with what’s happening and we will be working more closely with them.
NH:Yeah, I agree, and I think not only with the high street banks, I think big brands across the UK and across the world will partner with peer-to-peer lending firms to bring their services to their customers.
GA:So I’ll try and give you a slightly different answer, I think there’ll be a great deal of diversity of businesses like ours, a greater diversity of platforms, and I think platforms will begin to fail.
SC:Interesting, okay, with that I’ll bring the session to a close, thank you very much guys.
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