NEO Finance 2021 review: Efficient peer lending without middlemen

 


I haven't written new reviews for a while, mostly since I don't like writing bad reviews and there's little to say about most platforms. But for some reason NEO Finance was different. Two things stood out:

  1. They are listed on the Vilnus Stock Exchange (VSE) with the ticker NEOFI
  2. They operate a payment initiation service (PIS) Neopay

I'll explain further why I think these are important, but first, let's cover some more background.

NEO Finance history and background

NEO Finance is a peer lending platform, founded in 2015 by Evaldas Remeikis. Having been in operation now already for over 6 years makes NEO Finance relatively old, which is very good. Nowadays the company employs 32 people, which is not a whole lot considering they operate two businesses.

Neopay was launched in 2018 in Lithuania and has since expanded to Latvia, Estonia, Netherlands, Poland and Sweden. Neopay is also integrated to Revolut, a massive neo bank from the UK, providing it access to the whole Europe. The full list of integrated banks is found here, and it is very extensive.

In August 2019, NEO Finance issued an IPO, becoming the first Lithuanian fintech company to be listed. The share price at IPO was 3,11€, was at its lowest around summer 2020 at 2,6€, and has now climbed back to 2,9€ Daily volume of the stock is a few tens to a couple hundred thousand euros.

Since NEO Finance isn't profitable yet, it had to raise slightly more funds during 2020. It did this by issuing 120 thousand new shares and thus raised 263k€. In other words, the need for extra funding was not very high.

NEO Finance has over 12 000 investors on the platform and they've issued in total 64MEUR in loans. Not a huge player, but significant.

How NEO Finance works

NEO Finance works in the very traditional peer lending manner by issuing the loans themselves and matchmaking the loans with private investors. It is important to note then that NEO Finance does the credit risk evaluation themselves and that they do not have other loan originator partners, whose loans they would refinance.

The company offers consumer credit in Lithuania only, but has a staggering 50% market share in the country. Through the unlimited e-money institution (EMI) license, there shouldn't be anything stopping NEO Finance to expand to other countries, except natural barriers to entry. When you do credit risk evaluation and debt collection yourself, you need to have access to excellent information, history and good ties to bailiff/distraint processes.

What is Neopay then?

Neopay is not very related to NEO Finance, except that customers of NEO Finance can use Neopay to depost funds to the platform. That's actually a good example of this technology.

Often peer lending platforms will give you SEPA wire instructions to deposit money, which they will process in a few days. Especially when paying with a credit card, people are used to the transaction being instant. Why isn't it always so with bank wire payments?

That's the problem Neopay solves: when you want to make a bank wire payment, but you don't want to process SEPA payments with a delay, Neopay provides a convenient interface for you to initiate the payment and confirm it's all good. The service provider gets acknowledgement of this and grants you access to the service immediately - or in NEO Finance's case, updates the balance on your account.

Being integrated to Revolut means anyone with Revolut can use Neopay for an instant bank payment. And if you're wondering if there's any need for this, then it would seem so, and there were almost 3 million transactions done in Q42020 through Neopay, having grown 74% from Q32020 and almost 200% since Q42020.

How to sign up to NEO Finance

To begin investing on NEO Finance takes only four steps:

  1. Head over to neofinance.com and use the top-right button to Sign up
  2. Verify your identity. You'll need a passport or an ID card for this.
  3. Wire money to your account using a SEPA transfer (or Neopay if you have access to it)
  4. Invest manually or enable auto-investment

The whole process takes a day or two, but you can get all set up in a matter of minutes. I was able to sign up, start the verification process, transfer money and set up auto-investing in a few minutes. 

NEO Finance features

NEO Finance doesn't have the slickest interface, and to be honest, I had put off the platform to some degree because of that. But looks can be deceiving, and so they were in this case too. The functionality and feature set is actually exceptionally rich!

A lot of hype can be generated with slideware and fancy videos with hipsters in them. NEO Finance doesn't do any of that, has a dull logo and a fairly boring design to be honest. But when you actually dive into the company, you realize it's much more than a YAPLP (yet-another-peer-lending-platform).

Automatic investment portfolio

The basic settings of the automatic investment portfolio are quite straight forward. Here's what it looks like:


  1. Name: just the name of the portfolio as you can have many
  2. Rating: what rating loans will this portfolio invest in. You can only choose one.
  3. Max investment per loan: the maximum euro amount per loan to ensure adequate diversification
  4. Interest rate: the interest rates you're willing to invest in
  5. Loan period: the durations you are willing to invest in, in months.
  6. Provision fund: most importantly, do you want to include the provision fund or not

So pretty straight forward. But that's just the basic settings, there's more. Additional criteria can be used to target loans with much more granularity, but I fail to see the purpose unless you're not using the provision fund (read below).

With additional criteria, you can filter loans by following parameters:

  • Purpose of the loan (home repairs, car, travel etc.)
  • Education level of the borrower
  • Borrower's age
  • Amount of loan
  • Marital status
  • Assets the borrower owns (Car, Fiat, House)
  • Number of dependants
  • Length of latest employment
  • Total family income
  • Gender
  • Debt delay history
  • Total debt of borrower
  • How much the borrower is contacting financial institutions
  • Source of income
  • Target investment amount, after which the automatic investment profile will stop
  • Minimum investment per loan

There are some very interesting parameters there, and I'd love to have access to the original parameters of all their loans and the outcome what happened. If I personally wouldn't use the provision fund (which I do), then for me the main things to consider would be marital status and being a homeowner. To me, those should give some coverage against capital loss if the loan gets delayed.

Buyback and provision fund

I love how transparent NEO Finance makes the buyback guarantee! Other platforms either have buyback guarantee always on, or off, or depending on the loan, but NEO Finance lets you choose if you want to enable it per loan or per auto investment profile.

Enabling the provision fund does two things:

  1. It obliges NEO Finance to cover missed payments, ensuring a steady, predictable cash flow for you, and
  2. In two to five months after the loan got delayed, NEO Finance will buy back the remaining principal from you, covering also all missed interest.

If you're used to buyback guarantees from other platforms, it's good to note at least two things. Firstly, the provision fund is pre-paid by you, is finite and the balance is publicly communicated. You can therefore do your own estimations to how sufficient it is or can it run out. Secondly, the principal is bought back with a longer delay than on most other platforms. This shouldn't matter too much, since all accrued interest is also covered for the time. 

Provision fund stands at 426k€

The provision fund is actually itself a kind of hedge fund: part of the fees are used to invest in loans, ensuring the provision fund isn't idle cash. Part of the funds is cash, ensuring sufficient liquidity. At the time of writing, the provision fund stood at 426k€, just slightly over half of it cash and the rest invested.

What if you don't have the provision fund enabled?

If you don't have the provision fund enabled, things get a little more complicated when a loan gets delayed, but not too much. When two to five months has passed since the loan has become late, NEO Finance terminates the agreement and offers to buy it from you at market value (50%-80% of face value). You can choose to accept this, or continue to wait for the debt collection to go after the borrower. NEO Finance will do all this for you, and you just need to wait. But you might wait for a few years.

Waiting isn't necessarily a bad option financially, but it just means your principal is locked.

Skin in the game

NEO Finance co-invests into the same loans that they provide to private investors. In Q42020 the share of skin-in-the-game was somewhat over 7%, but it doesn't seem to be constant.

The reason co-financing loans by the platform is important is that this ensures there's always an aligned interest with private investors. When investors lose, the platform loses as well.

What would be even better would be a fixed, pre-determined share of all loans that the platform always co-invests. Since the amount seems to fluctuate, that leaves room for the platform to pick-and-choose loans they see a better risk-to-return ratio.

Secondary market



Even if a platform has a secondary market, it might not be liquid at all. Low liquidity means on one hand that you might find good opportunities there, but the downside is that when it is you who needs to liquidate your investments, you'll need to sell them at a steep discount.

The secondary market on NEO Finance looks fairly healthy though. In the above chart you'll see that loans are sold fairly often with even a premium or with nominal value. Sure, loans are sold with a discount too, which is to be expected if you are trying to sell a loan that's late and isn't protected by the provision fund.

NEO Finance historical returns

Historically, most investors (over 40%) have received between 10% and 15% returns on NEO Finance.

You can check the up-to-date statistics from the NEO Finance statistics page. You'll find the above chart from the very bottom of the page. The average returns NEO Finance reports is 12%, which is in line with the industry in general.

And 12% is nothing to scoff at. Imagine if you'd get 12% annually, systematically, year after year. According to The Rule of 72, your investments would double every 6 years. But of course, since you'd be adding more capital over time, the amount you'd have is much greater.

To play with the idea, try out my NEO Finance compound interest calculator below.


Just remember, past performance is no guarantee of future.

NEO Finance risks

There's always risk of loss of capital. Say you invest in a loan and the borrower cannot pay back, ever. There goes that. But consumer credit investing is volume business: you're supposed to invest in a decent number of loans so that even if some of them will default, the success of the others can cover for that. A decent amount would be at least 100 loans of equal size, so one loan is 1% share of the total portfolio. You can always enable the provision fund for your investment as well. While that's not a 100% guarantee either, it does lower the risk of loss of capital.

Since loans of up to 10 years exist on the platform, you should very thoroughly consider liquidity risk. What if you need the money next week, but it's tied for years on the platform? Luckily the secondary market seems fairly efficient here. If the loan is current, there shouldn't be any trouble selling it with nominal value. A significant amount of loans even sell for more than their nominal value. And if you have enabled the provision fund, the loan will be bought back if it gets delayed.

There's always the platform risk, especially when it seems pretty clear that NEO Finance is cash flow negative. At the same time, NEO Finance's sales revenue grew by 43% year-on-year in Q4 2020. With these growth numbers, I'm not concerned about them running out of cash. There's always an investor willing to finance growth like that. I just hope they expand to more countries with their consumer credit business.

If you're interested in reading more about the topic, head over to my dedicated article on peer lending risks.

Afterwords

I am quite blown away actually by NEO Finance. They're listed. Regulated. Market leader. They have a fast-growing viable side-business. They have a PISP license. EMI license. The list seems to go on forever.

And you just have to love the feature set. Personally, I don't care so much about Neopay, but the fact that they have it and they're processing over a million transactions every month is very impressive. But the way they've openly built the provision fund and how they let you choose or skip it. How rich information they have available for each of the borrowers. It's just a shame they only lend in Lithuania for now, they should expand!

I don't hand out five star reviews so easily anymore, but NEO Finance completely deserves it. So there, NEO Finance, five stars ⭐⭐⭐⭐⭐!

If you want to read more about how they are doing, I suggest you head over to their financial reports. There's quite rich information there for quite some time.

If you're considering to give NEO Finance a go yourself, here's something to make that decision a little easier: by using my referral link, you'll get 25€ for your first investment on complete registration!

If NEO Finance doesn't quite sound like it's up your alley, then perhaps you might be interested in these peer lending platforms instead:

Or if you'd fancy something different to peer lending, you might be interested in lending to businesses:

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