Peer-to-Peer Lending Platforms with Buyback Guarantees
Peer-to-Peer lending is a mechanism built upon traditional forms of investing. It allows hundreds of people to crowdfund projects of their choosing. Prior to crowdfunding technologies, to start enterprises business owners and entrepreneurs would seek investors or loans from banks in order to open their ventures. This was due to many reasons but one of the big ones was risk.
For private individuals to become full time lenders they would be taking upon themselves a lot of liabilities. Peer-to-Peer lending platforms today address that potential risk by providing the investor a buyback guarantee. Now, buyback guarantees are somewhat controversial and not as straight forward as, "your money is guaranteed".
The evolution of financial technologies and the inter-connectivity the internet provides has set the stage for peer-to-peer lending. One of the main attractions on lending money with peer-to-peer networks is that the platforms which service P2P loans provide a safety net called a buyback guarantee. What this means is that when a loan defaults after a certain period of time, roughly, 14 - 60 days, then the platform or partners of the platform will buy back the loan from the lender. The platform will generally pay back, at the very least, the principal afterwards whatever amount of accrued interest can possibly be paid back.
Buyback guarantees however are only as good as the organization that guarantees them. Many have considered the feature controversial as it does not fix the problem of a defaulted loan. Rather, it simply moves the problem from the borrower on to the platform.
Some platforms are very efficient at dealing with buyback guarantees, some platforms a little less. This blog will touch upon both buyback guarantees and the companies that administer them.
PeerBerry
PeerBerry is also a loan originator aggregator. PeerBerry was founded by a loan servicing company called Aventus Group. Aventus group as a financial institution has been profitable for decades. They provided Europes most well known Peer-to-Peer lending platform Mintos with loans until they realize they wanted to replicate their own peer-to-peer platform. PeerBerry however, differs in a few ways from Mintos.
PeerBerry offers two forms of guarantees on their platform. Buyback guarantees which are offered by the loan originator and a group guarantee that is offered by all the loan originators. The buyback guarantee is the first line of safety, when borrowers initially default, the group guarantee acts as a safety net for investors. But sometimes, this guarantee is not enough, and all the loan originators need to step in to assist their failing loan originators.
PeerBerry also has another feature that makes it very unique. The loans on PeerBerry are only a fraction of the actual lending portfolio of their loan originators. To illustrate, if there is a loan on PeerBerry for 10,000 EUR, investors can expect that PeerBerry has already funded the vast majority of it and investors are only taking a piece of the pie.
This model ensures that Aventus Group has more control over the status and servicing of the loans on their platforms. Investors are only getting a piece and that's an important distinction between PeerBerry and the vast majority of Peer-to-Peer lending companies.
Mintos
Mintos is a loan originator aggregator that services two peer-to-peer market places. The minimum entry deposit is only 10 EUR and it advertises a yearly return of 9 - 12 percent. Mintos is regarded by many as the best peer-to-peer platform in Europe, and arguably, the world.
They implement a multitude of instruments that makes investing fun and profitable for their investors. Their primary market is where Mintos' loan originators offer their pre-funded loans, which means the loan agreements are already funded and lenders have the option to participate in the loan originators lending operation. The secondary market exists solely for the sake of liquidity. Investors may find themselves in financially uncomfortable positions and may need their capital. They also might find a better opportunity cost in a different loan. Either way, Mintos offers high liquidity on their investments, which is an unarguably great feature.
Mintos' Buyback guarantee promise that if a loan goes 14 days without being paid then the loan originator of that buyback guarantee will buy the loan back. This includes principal and whatever amount of accrued interest can be paid. The majority of the times this is done without a problem. But sometimes, it gets more complicated. To find out more, you can look to our blog on Mintos' loan defaults and subsequent fund recoveries.
A Comparison of Loan Originator Aggregators
Loan originators are companies or entities that issue out loans to businesses, consumers and even government organizations. They are licensed businesses that profit from lending money. Loan originators on peer-to-peer platforms put up their loan agreements for lenders around the world to participate. To illustrate, Loan Originator Aventus Group issues loans to people around the world. They notice that many would pay 1% of their overall returns if they could get in on the same deal Aventus Group has. So Aventus Group charges a 1% fee and allows thousands of people around the world to participate in the same money mechanism that has already made wealth for Aventus Group.
PeerBerry and Mintos are not loan originators, they are loan originator aggregators. They host a multiplicity of loan originators on their platforms which users can select loans from. The two platforms have a lot in common but they also maintain a few differences. Mintos gives their loan originators ratings based off user experience. PeerBerry only provides the financial statements of their loan originators and users can decide based off this.
The two models have their strengths and weaknesses, but it is probably more effective in the long run to allow investors to simply read the financial statements. This information gives the borrowers the ability to simply track the previous failures and successes of loan originators they will end up choosing to fund. Other differences are more a matter of size, Mintos is a much larger than PeerBerry in terms of investors, portfolios, loan agreements and employees. When PeerBerry reaches Mintos' level of activity, then perhaps PeerBerry will have to find a way to automate and indicate the profitability of their Loan Originators.
State Guarantees
Due to the corona virus pandemic some states rolled out state guarantees. Such guarantees are not only relevant to peer-to-peer lending but to the lending business as a whole. The peer-to-peer lending platform October appears to be one of the few platforms to receive a green light for state guarantees. A state guarantee works the same way as regular buyback guarantee or group guarantee, when the loan defaults for a period of time, defined by the respective government, the government will buy the loan off the investor and return his principal.
The two countries to provide such guarantees are the Italian and French government on October's platform.
October
October is a peer-to-peer lending platform that focuses on Small - to Medium Size Enterprises or SME's in Europe. There is a 20 EUR minimum deposit with October and lenders can expect a 3 - 7 percent yearly return. SME's currently make up 56% of Europe's entire economy. October believes in this market and allows the international community to participate in funding European business.
October is very much an EU project with a purpose to develop and improve Europe's existing economy. Business owners on October are highly vetted and display a proof of income so that lenders feel comfortable on their platform.
While October does not have a buyback guarantee it is has been incredibly successful in fund recoveries and debt restructuring to ensure their investors principal is always protected. If the situations becomes more dire, then more states will likely roll out state guarantees for the credit markets as they are always the highest risk during a recession. In order to enjoy a guarantee on October, make sure to select loans that are in France and Italy.
Fund Recovery Strategies
BuyBack guarantees are in no way the only way to secure funds. There are multiple ways for platforms to seek out their missing moneys. If a company offers collateral on the loan which is equivalent in value to the amount of the loan than it is a very simple process to retrieve missing funds. For example, real estate crowdfunding platforms like EstateGuru or Reinvest24 simply sell off the piece of property which generally has an LTV ratio of 60% and below.
Other platforms that may not necessarily have collateral to sell off may in get in touch with borrowers to discuss a restructure in payment. This often means reducing the monthly payments, but increasing the time period, and therefore, the overall interest. You may not appreciate the lack of liquidity in debt restructuring, but it is undoubtedly better to receive your money over time than not at all. Mintos, for example, opts to go for a new debt structure payment plan so investors can go about their business without worrying whether or not their investment is going be gone forever. The investors know the investment isn't going great, but it is returning. On the other hand, the benefit to this approach is that borrowers will also feel more comfortable on Mintos.
Mintos proposing a debt restructure is ultimately a best case scenario for the entire ecosystem. But that doesn't mean it always works. Nothing guarantees in a debt restructure that the borrower will continue to be faithful simply because the odds are more in the borrower's favor. When such an event occurs platforms must use their last resort: Litigation.
Litigation is the primary approach of fund recovery for platforms who do not have collateral or a debt restructuring strategy. Litigation will definitely get the money back from the borrower but the investor will generally see a fraction of it and the borrower is likely in a far worse financial situation then when his loan defaulted.
The only one who wins in successful litigation is the platform, and even then, litigation requires court time, lawyer work, and a great deal of stress on both the plaintiff and defendant.
Verdict
Buyback guarantees have been the subject of buzzfeed or clickbait. They are a great feature, but are often misleading to those who are seduced by them. Peer-to-Peer lending has multiple avenues to assure their investors their capital. PeerBerry, Mintos and October are all in danger of running out of ways to move debt.
Mintos, solely being an LO aggregator puts them in a difficult position regarding buyback guarantees. While their approach to fund recovery is admirable, it is also optimistic. Loans default, and when running a lending marketplace in multiple countries, it can be difficult to hold those who operate in a different country, accountable.This is deceiving because investors who come to Mintos are under the impression that Mintos, the platform, will guarantee their funds.
PeerBerry's multi-layered strategy in its short period of time has proven to be effective. No investor on PeerBerry has lost funds and PeerBerry continues to scale at a very stable pace even under pressing times. PeerBerry operates under a completely different model to Mintos and because of their model they will most likely never be as big as Mintos.
October is a great platform for the conservative investor. They do not offer a buyback guarantee but their fund recovery strategy and risk management teams are highly efficient. Like PeerBerry, October has never lost investor capital. October has been around for as long as Mintos but it's interest rates are significantly lower.
Mintos is at the top of many of our blog topics, and generally regarded as a bigger and better Peer-to-Peer platform, but when it comes to protecting investors, PeerBerry takes the top position.