As an AltFi reader, you are well aware that the age of peer-to-peer financing has started - data confirms it. Market entrants are rapidly expanding, some of the early ones already turning profitable, and the number of emerging platforms trying to get in the business is increasing on a daily basis.
But of course, it is not always rainbows and butterflies, especially in a fairly new industry with hundreds and even thousands of players. Not too long ago, a major European platform already filed for bankruptcy, and the situation in China is even worse. According to Henry Yin, Managing Director of CreditEase, around 700 platforms have gone bankrupt this year in China alone.
So how to identify a promising platform? What should investors look for when deciding between various alternatives? Amongst other things, we suggest to answer these 5 questions:
1. What type of loans are you investing in?
Comparing to ten years ago when the industry pioneers started with unsecured, low-amount consumer loans, now there is a plenty of alternative investment opportunities available on the market: asset-backed loans, invoice financing, real estate crowdfunding - you name it.
An important factor influencing your investment decisions is the level of risk you are willing to undertake. Obviously, secured loans are a comparatively safer bet than investing in consumer credits, while the success of one's equity investments is heavily dependent on every specific project's success, and thus the due diligence of those projects. For instance, if you are risk-averse person, secured loans are probably the best option, and vice versa.
2. What are the levels of return you are seeking?
An important factor, closely tied to the riskiness of an investment is the projected return. And, while it might seem as a rule of thumb that unsecured investments should offer higher projected returns than secured lending, it is not necessarily the case.
One reason behind this is different stages of development of various regions within a bigger market. Europe nowadays is a very good example of illustrating this. The market in the UK is highly developed, both regarding regulation and competition. Germany and France are following traction-wise.
In the meantime, the number of alternative financing institutions in other regions, such as Eastern Europe, is relatively small, resulting in market inefficiency. Projected returns from investing in a secured Eastern European loan can exceed the yield of an unsecured British consumer loan even three times.
The low level of competition between non-bank loan originators in underdeveloped markets gives the few players more power to set the market tone, to charge higher rates from borrower, and to offer better yields on their investments. However, before putting money into what seems a very attractive deal, investors should remember to keep in mind two factors: the market of the investment product, and the platform risk.
3. What is the state of market a platform is operating within?
More and more new companies set to disrupt the old model of financing are born every day. The sharing economy has proven itself to be vital for the growth of unicorns. But despite these and several other changes, certain fundamentals of economics should still be kept in mind.
As mentioned earlier, peer-to-peer lenders and crowdfunding platforms are attempting to reshape a number of sectors. Whether it is SME lending in France, consumer lending in Spain, invoice financing in the UK or real estate crowdfunding in Estonia, it is in your own interest to take a good look at the particular country and market prior to placing an investment.
Certainly, platforms in underdeveloped markets can offer more attractive returns to investors, and peer-to-peer financing is not the only industry where such thing can be observed. But what will happen in the medium term, or in the long run? What happens when more competitors appear, and the market organically drags the rates down? How about the liquidity of collaterals, when an asset-backed loan defaults? What do the market forecasts tell?
4. How credible is the platform?
As the recent case of TrustBuddy shows, platform risk is neither just another thing to be mentioned in the FAQ section, nor a threat that only small platforms are subject to.
Once again, think about the loan product you are investing in. If it is secured, what is the quality and liquidity of collateral? What do the loan-to-value (LTV) ratios tell about the level of risk? Does the company or its team members possess experience, strong understanding or track record in the field it is operating in? Do they have their skin in the game (pre-funding all of the loans is one indicator)?
From the product point of view, keep in mind that it is literary about money, so user onboarding might suffer for the sake of safety and compliance. Quite the opposite: if you can get from opening the registration form to depositing funds and placing investments within 15 minutes and without undergoing identity check, be extremely careful.
Transparency and simplicity is another thing worth your attention. Complex navigation, uncertainty about simple details, sophisticated layout, lack of disclosure - such things can be rarely observed on great platforms. Finding the perfect mix that delivers great user experience, highest level of safety and secure onboarding is a real challenge for platforms. But when you feel it, remember that it represents hours and hours spent on product development, just to build confidence and bring comfort to the investors.
Last but not least, diversifying your investments between different platforms is another thing to consider. By doing this, you can protect yourself from being exposed to platform risk.
5. Is the platform representing the new model of financing?
While the question sounds rather odd, having fundamental differentiators in place is a crucial thing. Without them, the competitiveness of a platform over traditional banking is considerably diminished.
How much time and effort does it take to actually get financing or start using a platform? Are the terms better and costs significantly lower for both investors and borrowers? Is the platform itself operating smoothly and fast? What about advanced features to make investing more simple, or to exit investment prior to their maturity?
Peer-to-peer lending platforms were created to challenge traditional banking by increasing the accessibility to financing, offering better deals to investors, being faster and more efficient, and excluding odd intermediaries. Sure, all the best platforms have these things figured out, but a fair share of these companies are so great because of their fundamentals.
This post originally appeared on Viventor blog.
Viventor is a peer-to-peer marketplace offering investments in loans secured by real estate mortgages. Investments generate from 6% p.a. fixed, and come with Buyback Guarantee. The average LTV is 28,45 & the average maturity is 21 month. To find out more, visit Viventor.com