Why some investment platforms fail and others don’t?
Peer-to-peer lending has been on the up and has seen many new arrivals to the industry but just as there are new players coming on to the scene, several have gone to the wall. This raises the question: Why do some platforms fail and others go from strength to strength? The Debitum explores some of the issues….
Stability, transparency, and integrity.
A platform needs to be accessible, easy to use, with clearly laid out information and effective customer support in place. When that is not there, confusion and uncertainty ensues, and there is the potential for the erosion of trust, particularly on the part of first time users.
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. All loans available on the Debitum platform are secured by some kind of collateral, which is detailed clearly under each loan. Additionally, the loan originators with whom we work are closely monitored. Unlike many of the other investment platforms that offer direct loans, the Debitum platform can 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.
Vigilance and due diligence are key to maintaining the stability, transparency, and integrity, which the peer-to-peer lending sector needs. By vetting loan originators before on boarding and monitoring them closely once on boarding has been completed, any weakness or poor performance can be identified and acted upon before the loan originator ceases to do business. Debitum stands out as a leader in this practice and for which we are undeniably proud. Unfortunately, this cannot be said about some of our other competitors.
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. Such swift action based on effective due diligence can only be for the good of the sector. Indeed, Debitum’s actions were not only noted by its competitors, but similar action was taken by them but much later. By looking forward and being proactive, while trying to minimise any unnecessary risk, investors remain calm in the knowledge that their investments are being well managed. Positive feelings lead to positive growth.
When it all goes wrong
In the last twelve months several investment platforms have closed down and some of them not without controversy. 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. As a consequence of this failure to conduct a basic requirement, Kuetzel lost any reputation it had and ceased operations. The after effects will linger on. Investors will lose most if not all of their original investments, and it leaves a bitter taste in the mouths of investors and reputable platforms.
The need for regulation
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 harmonising the minimum requirements when operating in their home market and other EU countries. It will also increase legal certainty through common investor protection rules”.
The criteria for applying for and being granted a licence should go some way to eliminating the less serious players in the market and reduce opportunities for scams and fraudulent behaviour.
Debitum believes that such a licence 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 particular cases, will be able to qualify for investment protection measures, including compensation of up to 90% of the defaulted amount but not more than 20,000 EUR. A licenced platform in a safe environment gives added value and growth and is attractive to both new and existing clients.
It’s very easy to make a judgement call based on headlines and a investment website. The more loans that are available might suggest that there are plenty of good investment opportunities to be had, but at what cost? 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 is of the opinion that by specialising in business loans and conducting proper and thorough risk assessment, the quality of the investment portfolio is enhanced.
There is no guarantee against failure but there is a lot the sector can do to avoid any unnecessary failure. 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.
Disclaimer: Investments in financial products are subject to market risk and any investment should only be done with risk capital. The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.