Shedding Light on Trustbuddy’s Redirection

Following on from our several week old coverage of Trustbuddy’s “seismic shift”, we’ve received further clarity around the company’s redirection.

The major shifts in Trustbuddy’s strategy, as we highlighted in early May, were as follows:

• A shift away from a short-term, payday style of lending towards long term consumer and SME loans.
• Geographical focus will now centre upon the Nordics, with Spain and Poland gradually being phased out of the platform’s activities.
• A wide-ranging cost reduction program that, once fully implemented, will see SEK 4m a month shaved off the company’s expenses.

After having spoken with a Trustbuddy representative, we can add a little more depth to each of the above elements, outline the motivations behind them, and also explore further evolutionary angles for the Swedish P2P platform.

The broad redirection comes in the wake of a fairly tough stretch for Trustbuddy. Former CEO Jens Glaso has stepped down. Linus Lonnroth currently holds the position of Acting CEO. The platform’s share price has had a rough ride. The firm raised €6.8m through a rights issue in mid November 2014 at a share price of SEK 1.20. Its shares are currently trading at SEK 0.35. And the platform also recently failed to secure a kind of “banking lite” regulatory license. All of this factored into the decision to change tack.

The re-focusing of resources has been a major point of emphasis in the recalibration. The geographical shift away from Spain and Poland reflects the simple fact that high quality loans are hard to find in both localities. Together these markets represent under 1% of Trustbuddy revenues, and are now being phased out.

The Spanish office has been closed, the Polish office (which is incidentally Trustbuddy’s largest) will remain open. While the platform’s lending activities will be focused on Scandinavian countries, 60% of Trustbuddy’s staff will now operate in Estonia and Poland.

Trustbuddy sees the Nordic regions as its first priority – pointing to the fact that there are, as yet, no direct competitors of significant scale. The second largest P2P platform in Sweden at present (behind Trustbuddy) is Lendify, which we profiled in April, and which launched less than a year ago.

The platform’s proposed cuts hinge on automating as many repetitive human processes as possible, and will reportedly equate to a saving of SEK 50m a year. 75% of this cost-slashing program (the cuts themselves, rather than the cost-saving) has already been enacted. The company expects to see a positive SEK 2.4m on the cash flow in June as a result.

Trustbuddy’s divergence away from payday loans represents an admission that the model is not sustainable. It invites a heap of regulatory and media scrutiny. Henceforth Trustbuddy’s core product will look a great deal more like Lending Club’s long duration consumer and small business loans. The platform will continue to offer short-term products, but these will be credit priced and delivered in a familiar P2P lending format. Payday loans are of course not credit priced.

Over 320k customers have made use of Trustbuddy’s payday loans in the past. The platform hopes to retain a large portion of that customer base, given that they’ll still be capable of accessing short term funding via the site. 

But how will Trustbuddy assess creditworthiness in the Nordics going forward?

The Swedish consumer lender has constructed a proprietary credit scoring engine, which will go live in either June or July. The shift towards relying wholly upon this newly minted machine may be gradual, but in time Trustbuddy will no longer depend on the credit scoring capacity of third parties.

Trustbuddy has made over 570k loans since inception, gathering deep reserves of loan data in the process. The platform’s new credit engine feeds off these reserves. The technology has been built in-house, using advanced mathematics and statistics on a cloud-based architecture, and Trustbuddy is already touting it as a unique strategic advantage. The platform has poured a great deal of resources into its construction. The feeling is – with the vast majority of P2P lenders leaning on traditional CRAs and other third party credit assessors – that a purpose-built, next-generation, in-house model will stand as a significant edge. The platform has tested this new construction against traditional credit models, and the former reportedly comes out on top.

Thanks to the company’s new credit policies, and to its tailor-made credit engine, Trustbuddy expects to see a 20% to 50% year-on-year decline in the number of originated loans that enter into debt collection. The platform suggests that this will have “a substantially positive impact” on the returns accrued by its private investor base.

Trustbuddy’s various schemes and about-turns represent perhaps the most sudden and severe change of direction that we’ve witnessed within the European P2P sector. We’ll keep a watchful eye on how the platform’s plans pan out.