Peer to peer (P2P) lending has been a relatively popular or widely-adopted business model and it has seen many new platforms attempting to offer these types of services, the Debitum team writes in a blog post.
However, Debitum, a Lithuanian platform offering borderless SME financing, points out that “just as there are new players coming on to the scene,” several others have exited the market. The Debitum team asks “why do some platforms fail” while others manage to maintain operations.
According to Debitum, a platform must be accessible, “easy to use, with clearly laid out information and effective customer support in place.” When these things are missing, potential users may get confused and might be uncertain as to whether they want to participate in offers via such platforms, Debitum noted while adding that lack of clarity may lead to trust issues “particularly [for] first-time users.”
Debitum recommends:
“Investment platform users need to evaluate platforms carefully before making the decision about which one to invest with. Investors need to know about the securities offered not just by the platform itself, but also the borrowers and loan originators.”
The company confirms that loans provided via the Debitum platform are “secured by some kind of collateral, which is detailed clearly under each loan.” They also pointed out that the loan originators (with whom we work) are monitored quite closely.
Debitum’s management adds that, unlike some other investment platforms that provide direct loans, their service may be “considered unique as it is more of a marketplace due to its cooperation with loan originators, thus introducing a peer to business type of relationship within the platform.”
Debitum further noted that vigilance and “due diligence” are the key to “maintaining the stability, transparency, and integrity, which the peer-to-peer lending sector needs.” They further noted that by carefully vetting loan originators before onboarding and “monitoring them closely once onboarding has been completed, any weakness or poor performance can be identified and acted upon before the loan originator ceases to do business.”
The company claims that its platform stands out as one of the leaders in this practice, but “unfortunately, this cannot be said about some of our other competitors.”
Debitum’s blog post continues:
“Ongoing vigilance enables platforms to identify any discrepancies in the financial data provided by loan originators. Platforms must be robust in maintaining due diligence and for this very reason Debitum decided to remove the assets of one of its loan originators from the platform and refund investors.”
As noted by Debitum, this type of “swift action based on effective due diligence can only be for the good of the sector.” They further claim that their actions were “not only noted by its competitors but similar action was taken by them but much later.”
Debitum also mentioned that “by looking forward and being proactive, while trying to minimize any unnecessary risk, investors remain calm in the knowledge that their investments are being well managed.”
During the past year, several investment platforms have been forced to shut down and some of them “not without controversy,” Debitum noted while adding that “one such platform – ‘Kuetzel‘ did not engage in due diligence procedures with its lenders and as such, fake loans offering 20% returns were being advertised on its platform.”
Because of this type of mismanagement, which included the failure on the company’s part to carry out basic requirements, Kuetzel (and other platforms) lost its reputation and has now closed down its operations, Debitum noted.
The long-term effects of these incidents will “linger on,” Debitum added while noting that investors will “lose most if not all of their original investments.”
According to Debitum’s analysis and observations:
“The investment sector remains for now, unregulated but that does not mean regulation is far off or that it is not supported by P2P platforms. There is a general understanding that every company should be audited and regulated and work is in progress at European level. The ECSP (European Crowdfunding Service Providers License), according to the European Council, ‘aims to remove barriers for crowdfunding platforms to provide their services cross-border by harmonizing the minimum requirements when operating in their home market and other EU countries. It will also increase legal certainty through common investor protection rules.”
Debitum further noted:
“The criteria for applying for and being granted a license should go some way to eliminating the less serious players in the market and reduce opportunities for scams and fraudulent behavior. Debitum believes that such a license will strengthen the stability, transparency, and monitoring of its own platform and that it will also ensure that the government’s financial market regulator will supervise all the platform’s activities.”
Investors, in certain cases, may be eligible or qualify for investment protection, such as compensation of as much as 90% of the defaulted amount “but not more than 20,000 EUR,” Debitum explained while adding that a licensed platform in a “safe environment” gives “added value and growth and is attractive to both new and existing clients.”
Debitum also pointed out that it’s pretty easy to make a hasty judgment call based simply on the news headlines and an investment website.
The company explained that the more loans that are available “might suggest that there are plenty of good investment opportunities to be had, but at what cost?”
The Debitum asks:
“What if a loan originator goes bust? What effect will it have on the platform and its investors? It is clear that vigilance, due diligence, and ongoing monitoring, are key ingredients to making an investing platform successful and in that regard the quality of loans is what matters not the quantity.”
Debitum believes that by “specializing” in offering business loans and performing thorough risk assessment, the “quality of the investment portfolio is enhanced.”
Debitum acknowledges that there’s never a guarantee “against failure but there is a lot the sector can do to avoid any unnecessary failure.”
Debitum concluded:
“Regulation is important as is each platform’s role in maintaining due diligence and the ongoing monitoring of its clients, which in turn contributes to the stability, transparency, and integrity needed to prevent investment platforms from failing in the future.”