This year will separate the wheat from the chaff with peer lending platforms

Recently, there's been a lot of grief in the peer lending industry. Kuetzal vanished. Envestio vanished. Looks like Grupeer is following suit. Wisefund cancelled the 'early exit' promise. So did Monethera.

Those who know what these platforms are (or were) can likely see a pattern: they all boast high returns and invest in SMB:s and/or development projects. And they're all located in either Riga or Tallinn.

What other platform has similar characteristics? Crowdestor. However, I agree with explorep2p that Crowdestor still feels like being in a different category, never having promised early exit opportunities or bottomless buyback guarantees.

But at the same time: notice what platforms are completely missing? Consumer loans.

Sure, there's always a loan originator in trouble on Mintos, but so far no major consumer loan platform has been in big trouble. Will we see consumer loan platforms come out as winners in this recession? Maybe.

The platforms fall in three distinct categories:
  1. Loan brokering platforms with buyback guarantees, such as Mintos, PeerberryViventor, Iuvo and Viainvest
  2. Loan issuer platforms with buyback guarantees, such as Swaper and Robocash
  3. Loan issuer platforms without buyback guarantees, such as Bondora
It will be interesting to see which kind of platforms will come out as winners.

Most of the volume is in the first category. Mintos alone is a huge player. But is that really where the quality is? Mintos can afford to broker a lot of risk on their platform since all of it is carried by the loan originators. If as an investor you're not careful you might end up with some low quality loans in your loan book.

The second group might be the most interesting one - at least in my opinion: platforms that issue their own loans but also provide buyback guarantees: Swaper and Robocash. Of these two it would seem like Robocash could be more stable, belonging to a huge profitable group. Swaper is extremely interesting, but more difficult to analyze as their financial statements aren't fully available. They have told that they were profitable in 2019 though. Both of these platforms provide extremely short term consumer loans and by just stopping the auto invest you can exit the platform within 30 to 60 days. These platforms have to offer quality or they will go out of business.

Swaper currently provides loans with up to 16% interest and Robocash has 14%. That's very nice for short term loans. Platforms in this group carry the highest risk since credit risk is centralized. However, if the platforms are good at credit rating, this group has the least number of middle men and thus potentially lowest overhead cost.

Lastly we have Bondora, a platform that makes you the loan originator (unless if you use the Go & Grow). Bondora's traditional lending divides people very much. It's an illiquid investment that has so far returned 27% in IRR in 2½ years. While I still might end up with a bit above average, there's good chance that long term returns could drop to 14% or even below. If I can stay above the average of 10.5%, I'm satisfied. 

Platforms such as Bondora carry the least platform risk since they don't have any burden from bad debt (but the most credit risk).

Why Bondora feels least risky right now

From the different kinds of platforms, Bondora is the only one that doesn't need to carry credit risk.

On Mintos the loan originator carries credit risk and might go bust, taking all of your loans with it.

Same applies to Swaper and Robocash (although I must say RoboCash Group's financials are quite impressive and Swaper was already profitable, so I don't think anything will happen).

Some loan originators that carry all credit risk will go bust. The loan originators that have the best credit risk algorithms will survive and later capture even larger market share. The strong will become stronger.

It's time to separate the wheat from the chaff.

Bondora doesn't have to carry credit risk. Instead the investor does.

This works for me. The CEO of Bondora has said that they have enough liquidity to weather the storm and they are profitable otherwise. So I feel confident the platform won't vanish. I just need to ensure my investments on the platform are solid. And so far so good.

How is consumer lending market doing

The stock market crashed in March, but how are consumer loans doing?

I happen to have access to thousands of consumer loans through Bondora and it is possible for me to analyze their behavior.

It does look like consumer loans will probably get a bit more delayed. This is actually fine, since it can actually increase my profits. Looking at the tails of the different loan vintages, you can see the slightly stalled progress from the recent month on repayed principal.

That part certainly needs to be followed closely. Most of my loans are in Finland where it is possible to re-negotiate your debt and people can get over crisis like this without losing their credit.

I was expecting to see payments being missed in March, but surprisingly it was the opposite. The amount of remaining principal that missed payments in March is smaller than any the previous three months. The principal of missed payments had grown until February 2020, and then dropped.

To me that indicates that while payments are made to the loans, more is coming through re-negotiated repayment schedules. Less people are actually missing payments.

When I look at the individual loans on Bondora, there are lots of C- and D-rated loans from Finland and Estonia that are marked as "delayed", but are actually paying monthly interest. It seems the term has been re-negotiated much longer as the principal isn't being paid, but interest is.

In some ways it's perhaps understandable. When I look at my own consumption, it's gone drastically down as I'm mostly just sitting at home. Governments are sending helicopter money to people, subsidizing unpaid leaves so companies can afford to keep their workers employed.

I'm not personally worried (yet) about individuals' capability to take care of their debt. Yes, certainly many will have challenges. Unemployment will increase and it will show in delayed payments. But so far while loans seem to have slightly slowed down, more loans are getting payments of some kind.

A bonus category: early exit platforms

I suppose there is a fourth platform category: those that provide "early exit" or "money back", such as FastInvest (review). Like with other early exit problems we've seen, these platforms can can drive themselves into liquidity crisis.

As investors become more careful, they might start to withdraw investments simultaneously. As this happens, the platforms are forced to announce delays in withdrawals, which causes more concern, and more early exit requests.

This is a design flaw in my opinion.
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