Breaking stereotypes

For interview in German click here.

To read interview in Spanish click here.

Two years ago, one of the latest peer-to-peer (P2P) funding platforms, Debitum, obtained investment brokerage license. Contrary to the usual stereotype of how crowdfunding platforms work, Debitum activity principles are similar to the bank, and no wonder – it is supervised by the Bank of Latvia. Forbes had addressed Debitum new owner Eriks Rengitis [Ēriks Reņģitis] about how the company has succeeded in the first five years and what is the development direction of P2P sector.

Katrina Iljinska [Katrīna Iļjinska]

You recently became the owner of Debitum – together with two colleagues: Ingus Salmins [Ingus Salmiņš] and Henrijs Jansons [Henrijs Jansons]. Tell us what your way to financial industry and entrepreneurship was!

I believe that I was lucky to understand relatively early in which field I want to work. In secondary school, in Riga 1st gymnasium, I studied in the international program where I could choose the subjects myself. I chose those related to finance and over time I realized that I both like them and I am also better at them. Later, I studied at the Riga Technical University and Banking University, started working in various financial institutions, and the confidence that I had chosen the right direction became stronger. Of course, parents and upbringing also played an important role in childhood. I have always been taught that two things are very important, education and hard work.

I have basically built my career in the field of corporate finance, managing M&A and fund-raising transactions. I started as an analyst and gradually became a co-owner of Auctus Capital, a corporate finance consultancy company, with which I am connected for more than a decade now.

How did you get to Debitum?

In addition to the above, I am also the financial director of BONO Group. BONO Group is Latvian capital company, in my opinion, a success story, and I am proud to be part of this team of experts. Last year, for example, the company’s turnover grew by 30% to 120 million euros. Let’s be honest, in the field of woodworking and logistics, such growth is a huge success. BONO Group has improved its range of activities in ten years of operations and now already offers a full range of logging and woodworking services – starting with the logging and woodworking, ending with the construction of wooden eco-houses.

Since for more than 10 years the field of finance have been significant part of my everyday life, naturally the Debitum platform came to my attention. Together with partners Ingus and Henrijs, we took the opportunity and bought Debitum from the previous owners.

Debitum convinced me with the non-standard product that offers to investors great way to diversify their portfolio. One investor once said that diversification is only for fools. The thesis was based on the idea – if you are really sure of a good investment, then why to diversify? But can most investors, especially small retail investors, be so sure about something, especially in current economic situation, that they can afford to keep all their eggs in one basket?

Debitum business model is to finance its partners (loan originators), who in turn are professionals in their niche and finance companies or projects themselves. Like the fund-of-funds model, where an investor invests money in the financial institution that itself makes direct investments. This allows the investor to invest in many diversified shares.

The funding platform, essentially a crowdfunding platform, is an area that is not lacking in stereotypes, and from the outside, it seems that the regulation is also unclear. Why such choice?

I can only partially agree with that. Debitum is very conditionally the crowdfunding platform. The only common thing that we have with crowdfunding (which traditionally finances business ideas in the very first stages of development), is the fact that anyone can become an investor, so only the crowd is common. In all other aspects, they are completely different concepts. It’s like comparing a bicycle to a car – both are vehicles, and yet have completely different purposes and operating principles.

What else is different?

Everything is different. If we look at how it has developed in general, we can say that P2P is a relatively new industry. More than ten years ago, it began to offer first investment opportunities to those individuals who want to invest simply – neither through banks nor through funds. Basically, it is an investment in refinancing. Despite the various incidents we heard about several years ago, we now see from statistics that industry is growing even in times of economic turbulence. The number of investors who trust and invest is constantly increasing. There are industries that have reached their zenith and are clearly facing a decline. P2P industry data confirms that it is growing rapidly, and its zenith is not yet in sight.

Speaking of differences, P2P is a broad concept. There are regulated and unregulated platforms. There have been failures among unregulated platforms where, from the outside perspective, funding appears to have been awarded against disproportionate risk or even suspected fraud.

In case of Debitum, the business model of the regulated platform has been chosen. We are the financial institution supervised by the Bank of Latvia with the investment brokerage company (IBS) license. From our point of view, this is the optimal model so that we can maintain dynamism and at the same time we are disciplined to offer the investor the professional product. Investor’s risk here is relatively low – investment objects are valued twice. At first it is done by our partners, loan originators, who have already issued the loan. The second time we revise it, choosing whether to refinance it. It is essential that the loan is secured by the company’s assets; it is actually the pledge. In addition, the IBS license stipulates that in case of platform insolvency, the Latvian State reimburses the investor up to 20 thousand euros.

What are the first results? Does this model work?

A lot has been accomplished in five years. The company has obtained IBS license, issued more than €70 million and has ensured that there is 0% default among our partners. We can say that everyone whom we have lent money is paying it back. In addition, our platform offers to invest in business loans, not consumer loans, as most other platforms do. Small and medium-sized companies, in which refinancing the money is invested, have huge growth potential and it is much easier to determine their risk level.

Basically, when you put all the factors together, Debitum product is very similar to banking products – predictable, stable, without excessive risk, supervised and licensed.

This immediately raises the question of whether the company’s team is comparable to bank teams.

Certainly, we have a team that we are proud of, and the experience and reputation of these people also reduce the risks, so investors should not doubt the professionalism of the entire company. Several highly experienced professionals have joined the management team this year. A few days ago, the head of the AML department, who comes from the banking sector, started work. Also, we have attracted one of the brightest- minds in legal in the Latvian fintech industry to the team. And I can continue about everyone – the whole team are professionals.

Tell us who your investors are! Considering that we don’t hear anything about Debitum in Latvia at all, I assume that they are not from Latvia or even Baltics. How many investors do you have and how do they invest? What is the average investment and what trends do you see in terms of investment? Where do they prefer to invest, where less?

Debitum and its team are located in Latvia, but it is true that the investors are basically not from Latvia.

We currently have more than 11 thousand investors. So far, investors with Latvian origin are only 0.1%, as the company was previously based in Lithuania; 23% are Lithuanian investors. In Latvia, the platform was not known at all. The regulation allows us to work with European investors, so basically investors come from Western European countries, such as Germany, Spain, France.

The average business, investor parameters is like the average temperature at hospital – it doesn’t always give you the accurate overview. However, if we must describe our classic investor, it is a 35-60-year-old middle or senior manager or an expert in some field. Mostly, these people regularly deal with various types of calculations, finance, and also understand the IT field. This is essential as it is easier for such person to switch and invest in the online environment.

We can divide investors into two groups in our platform – individuals and institutional investors. In the first case, a typical investment range is 3-50 thousand euros, while institutional investors – professional investment funds – invest from half a million to a million euros.

Does Debitum have a license in another country, not only in Latvia? Is it necessary, or is it enough to have only one IBS license in Latvia?

The license does not foresee specific jurisdiction in which Debitum can operate, so investments in financial instruments can be made from all European countries, and it is monitored by the Bank of Latvia daily.

Regulation is the objective criteria to distinguish between P2P platforms that are financial institutions and operate under stricter criteria compared to unregulated platforms that have more freedom to operate as they see fit.

There are three types of risks in the P2P industry – the risk of the platforms (the platform may announce the insolvency), the risk of the lenders (loan originators) and their business stability. And as the third, the risk of the investment assets themselves, that is, how secured are the assets being pledged. With the acquisition of the license, we have mitigated the first risk to a great extent. We are regularly monitored and audited by both the regulator and globally recognized auditing companies.

Is there any wider dialogue on platform licensing in the European Union? This, in my opinion, is an important question, as currently both licensed and unlicensed players can work in the same market, and everything seems to be fine. It looks like only the investors take responsibility in this case, but they must go broader and find out more about each platform separately whether it is licensed somewhere.

That would be a separate conversation. I also feel that there should be at least a separate name for unregulated and regulated platforms, so the investors are clear about this aspect at once. In addition, several European countries already prohibit the provision of such services without a proper license.

Mainly all industries have some regulation. I think reasonable regulation helps the industry. For example, there is currently a wide discussion about crypto currencies. There is an opinion that if the industry was regulated, it would develop better as the money of big investors would also flow into it. This is a big reputational risk for them (big investors) right now.

Yes, there are a number of requirements that Debitum has to meet on a daily basis, but I think it makes sense that income source checks should be carried out, especially in these geopolitically challenging circumstances. No rational investor would want to be associated, for example, with the financing of terrorism.

In Europe, crowdfunding regulation has been developed for a couple of years now, with a transitional period until November of year 2023, when the relevant platforms must improve their operations in accordance with the regulation. How this regulation will affect the industry we will see in the next couple of years. In any case, Latvia is a pioneer, as it was the first in the EU to introduce a regulation that corresponds to the P2P industry. And Latvia also has the strictest conditions.

Have you also invested in the project yourself – maybe not in Debitum, but in some other platform? Why? What is your experience? If you did, did you get your money back?

I have invested in a large number of platforms of Baltic origin and Debitum. Amounts may not matter so much here, but it allows me to compare platforms, stay up to date on product changes, and not live in my own bubble, so to speak. Most of the Debitum team has invested in the platform, which I think no need any explanations.

My conclusion, after observing the events of the last years in the investment world and in my investment portfolio, only those platforms that offer fixed return instruments such as bonds and P2P are relatively predictable. Here, when the platforms pay back funds, the investor knows exactly what return to expect. Elsewhere, either rapid and unpredictable value fluctuations or declines are observed.

Where do you invest yourself?

I think I won’t be original. I have tried standard products – deposit, stocks, and bonds both in the Baltics and outside. It is important for me not to spend much time and energy on investing. I see that some of friends invest, for example, in rental apartments, where a relatively large amount of time must then be spent to manage these assets.

You said that it is important for you that investments do not take much time and energy. Is it applicable to the situation when you must decide whether to invest in P2P or crowdfunding platform? Someone must actually sit and compare, and it become an issue right from the start…

It is to some extent, but when investing, you should always compare and make decision; this is a normal process. However, I can briefly tell potential investors that if P2P platform has a license, it is already quite safe. In any case, regulation and licensing already eliminate the first elementary mistakes, such as that you will simply be cheated.

How do you think P2P and investment market will evolve? I think in long-term and globally.

I think there will be a demand for P2P financing. The P2P market offers financing to partners who need financing but for whatever reason do not meet bank financing guidelines. Maybe not yet compliant, maybe there is non-standard coverage, maybe the market size is too small to develop guidelines. There is a lot of potential here.

Investors are interested in P2P as the younger generation wants to be more involved in the process and be in a more dynamic environment. Also, they are increasingly choosing online solutions such as Debitum. It provides excellent opportunities to do investing in quick and convenient manner, and then monitor and track your investments.

Regarding the future and the evolution of the platform, I expect P2P industry to start offering more lower risk products. Many products are still not easily accessible to private investors, for example, the minimum threshold for the purchase of some bonds is high – 100 thousand euros. Therefore, I predict that we will face the transformation or expansion of the P2P industry in the coming years. When we meet in a couple of years, we may no longer call this industry P2P.