The (non-trivial) risks of P2P Lending

I often talk about the risks of P2P Lending. I feel a strong duty to warn my readers against the possibility of losing everything invested on these investment platforms.
Unfortunately, I notice that not all financial information does it, sometimes out of ignorance, often out of interest.
It is indeed true that many of those who write about personal finance do not always have the means and knowledge.
In other cases, they superficially treat the topic without realizing that for some the money invested in these platforms is the result of sacrifices.
The problem with online communication is that everyone can express their opinion and that until proven otherwise everyone is equally right.
I listen to some Youtubers – in some cases good and also competent – who talk about finance in their channels and have a large following.
Kuetzal offices today
Even the less experienced ones are very good from a communication point of view, but they don’t understand anything about investments.
They combine ETF, Crypto, Bondora, Trading, and insurance real estate investment as if they were truly comparable investments and within everyone’s reach.
I advise you to listen to them but always to deepen and never get caught up in the rush to invest.
There are no opportunities that are running away and if someone tells you otherwise it is probably in bad faith.
Never forget that often behind an article in a blog or an online video there is a form of affiliation and therefore of income for those who produce the content.
This issue is of particular relevance given what happened to the Estonian Quetzal platform, now in serious difficulty and at very high risk of closure after the critical issues that emerged with the Alborg Petrol project.
Alborg Petrol is the first major scandal in the industry consisting of a loan of 850,000 euros to a substantially non-existent company.
This case brought to light all the problems of an opaque platform, with poor management, inadequate project selection, and unclear ownership.
Along with Kuetzal’s problems, many doubts have emerged on other platforms including Envestio and FastInvest.
If you want to learn more, I suggest you follow the Roasted PeerDuck Twitter account which first launched the doubts about Quetzal then excellently picked up by Jorgen Wolf’s ExploreP2P.
As for Envestio, it should be noted that the doubts concern various aspects including the new CEO, the recent sale of the company, and the quality of some projects.
But let’s go in order and see why P2P Lending, especially as regards foreign platforms, is a high-risk investment class.
In this article
# 1 – P2P Lending is a newborn industry
# 2 – There are no regulation and control bodies
# 3 – P2P Lending projects are high yield and very high risk
# 4 – Information is lacking for an informed choice
# 5 – It is not certain that the P2P Lending industry can withstand a scandal or a financial crisis
What to do to better manage the risks?
Conclusions
# 1 – P2P Lending is a newborn industry
If you also follow the world of peer-to-peer lending, you know very well that a new platform is born every month, hailed by everyone (myself included) as the new revelation.
In a newly born industry, it is easy to introduce novelties, new functions and therefore to innovate the sector radically.
The truth is that most platforms are really small and fragile.
They don’t have large funds or shareholders behind them who can truly support their growth.
There is therefore a high risk of not being able to financially support the explosion of users, projects, and fixed costs.
Many operators could make some youthful mistakes in various fields: selection of collaborators, protection of our data from cyber attack, selection of opportunities, et cetera.
It is clear that we will see a process of aggregation between platforms and that the smaller ones are destined not to last over time.
The fact that the industry is relatively new brings with it the biggest problem I see at the moment: the lack of regulation.
# 2 – There are no regulation and control bodies
I am not talking about Italy where the regulation is stringent and there is a clear separation between the capital of the platform and the capital of the lenders, but of the foreign platforms and above all of the Baltic platforms.
These operators enjoy wide discretion and freedom in operating.
This, on the one hand, is a positive aspect that allows the development of platforms, their sudden growth, and the introduction of new features.
On the other hand, it is the main reason why it is not possible to compare this class of investment with other forms of investment.
It is also the reason why it is very easy to:
there are scams associated with some P2P operators;
money from lenders being used to grow the platform or even distracted;
illegal capital flows into the platforms.
# 3 – P2P Lending projects are high yield and very high risk
We are all happy with the fact that P2P platforms offer very important returns, on average higher than many other types of investments.
This higher return is closely related to the greater riskiness of the debtors and of the companies that are financed on the platforms.

The classic objection is that projects or people who have more difficulty accessing traditional credit come to these tools.
This is almost always true but the fact remains that some projects are still worthy of attention.
# 4 – Information is lacking for an informed choice
One of the most important aspects of financial reporting is transparency.
To date, we can say that it is absent in most of the platforms.
I am talking about both general information on projects, which are often not exhaustive, and information on the platform.
It is not always clear who the partners of the platforms are, how much they earn, in what form they do it.
Not all of them publish their annual financial statements and communicate data on raising new money.
This expectation is linked to the lack of regulation and control and certainly cannot be left to the free choice of platforms.
I am sure that we can work on this expectation and that the leading platforms must draw the line in order not to discredit the entire industry.
# 5 – It is not certain that the P2P Lending industry can withstand a scandal or a financial crisis
Around the corner, after a rather prosperous decade, there is the possibility of an economic slowdown.
It is not clear what the impact could be on an industry born a few years ago.
The larger platforms could have the structure to better manage this eventuality and perhaps they have even developed emergency plans.
On the other hand, are the smaller platforms ready to handle a possible crisis?
Do they have business continuity plans in place or consultants and consultants ready to support them?
What to do to better manage the risks?
In the last period, strange clouds have been gathering on the crowdlending market.
The crisis of Quetzal and the possible one of other smaller platforms must force us to reflect and a strategy for managing the risks of our portfolio.
I recommend never risking more than 5/10% of your assets in P2P.
This percentage varies according to age, risk appetite, and size of assets.
I am currently about 10% but I would like to reduce the percentage to 7% at most.
The second golden rule is to differentiate between multiple platforms and platform types.
There are marketplaces dedicated to real estate, personal loans, and those to companies.
It can be an alternative to split your money in a fair part and choose at least one platform by type.
Finally, I advise you to avoid exchange rate risk, focusing only on euro loans, avoiding adding an unnecessary complication to an already complex investment area.
Conclusions
I think the P2P Lending investor should be aware of the risk of losing everything at any moment.
I do not think that all platforms can close at the same time and that is why we will carefully be able to earn in the medium term.
But I don’t want to ignore that single projects or platforms can fail and take our money with them.
I wouldn’t just focus on the smaller ones and would avoid investing everything on a single platform no matter how established.
I advise you never to fall in love and always think from a critical point of view, without fear that the investment of life may escape you.
Please, forget what others say and always form your own opinion.
Rule 1 of every investment is 1always to invest only in what you know and understand.

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