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.
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.
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:
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.
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.
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.
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.