Let’s find out how to invest in peer-to-peer with our guest Kimmo Ritkönen, founder and CEO of Income, the peer-to-peer market platform.
Hello Kimmo, thank you very much for joining us today. Let’s start with fundamentals, could you please explain what is P2P marketplace is, how it works, and how it differs from classical crowdlending?
A P2P (peer-to-peer) marketplace is a platform that lists loans from several different loan companies. In contrast, a classical crowdlending platform lists loans based on borrowers’ applications and connects them to lenders (investors) directly through the platform. So, in this case, a loan is given from “peer to peer.”
In classical crowdlending, the platform usually manages customer acquisition, origination risk, and collection activities of the issued loans. On a marketplace, the loan companies listing loans are in charge of those functions.
If I want to start investing in P2P marketplaces, based on which criteria should I choose platforms?
An investor must understand that the marketplace and its management are their first line of defence against losses. This is why the investor needs to choose a platform that can act in the best interest of the investors if things go wrong. There are two aspects to consider:
- Many marketplaces work only with related party loan companies. While this approach has its benefits, an intense conflict of interest is baked into this business model. If the loan company fails and is tightly affiliated with the marketplace, is the marketplace able to act in the best interest of the investors? I would choose a platform where this risk does not exist.
- How is the capital of investments protected, and how transparent is the marketplace about this? If there is little information about the loan companies listing loans or how your investment is secured, it’s probably better to skip the marketplace. A good marketplace has robust investor protection mechanisms and is transparent about how it does business and the people managing it.
How to understand which deal/ loan originators (LO) to choose to invest in, their/ deal risk level, and whether is price adequate? European crowdfunding service providers regulation (ECSP) will oblige platforms to show default rates, and explain how the suggested price was calculated. ECSP will not be applied for P2P marketplaces, but does similar things or will be available on platforms?
The first thing to state is that it is challenging for an investor to assess which loan companies are good or bad and to consider all the possible risks that could materialize. This is why it’s essential to focus on how the investments are structured and what investor protection mechanisms are in place on a marketplace to protect against a possible loan company default. I personally, as an investor, would demand all marketplaces to apply the “junior share” and “cashflow buffer” mechanisms which currently are only available on Income, as these are standard protection measures used by institutions when investing in loans. Unfortunately, other platforms are not implementing these features currently.
I think transparency is essential, and marketplaces should give out clear statistics about their loan companies and provide presentations and financials so that investors know where they are investing. On Income, we have a statistics page showing the late portion of each loan company (getincome.com/statistics) and an API connection available through which more advanced investors can access the loans and even more data transparency.
Almost all investments via P2P marketplaces are done through so-called Auto Invest (a tool that invests investors’ money automatically based on a set of rules, like LO rating, country, currency, max, limits, etc defined by investors). My question is how to use auto-invest properly, how to evaluate the performance of a portfolio, how often to make updates, and other tips to make the most of it.
I’ve been investing in marketplaces for some time, and I’ve found the best way to set up an auto-invest tool is to make a separate strategy for each loan company I wish to invest in. So if you have, e.g., 3000€ to invest in and want to divide it equally between three different loan companies, then making a €1000 strategy for each one gives you more precise control.
Most marketplaces give you good tools for overviewing your portfolio and even the ability to check separate parts of your portfolio. Most platforms these days also have a buyback guarantee/obligation feature, which is the key to making marketplace investing work.
A buyback guarantee often was presented as and understood by investors as a “100% buyback guarantee”, but it is not true, so what it is in practice how it works and what is real investor risk?
It’s good to note that I would not invest in loans that the buyback obligation does not cover, meaning that the loan company is obligated to repurchase the loans that reach 60 days overdue from you as an investor. The buyback obligation makes using the marketplaces and investing relatively easy as long as there are no problems with the loan company itself. In this case, other investor protection features become, of course, more important, as I mentioned above.
What is your advice for people who want to invest in peer-to-peer marketplaces?
As with any investment, understand what you invest in. This means reading about the marketplaces you are interested in. Income, for example, has a blog at getincome.com where we try to educate and inform all investors about investing loans, so that can be an interesting source of information for beginners and more advanced investors alike.
Thank you very much, Kimmo, I believe after reading this interview more people will understand what the P2P marketplace is and how to invest safely.