Don’t lend to the peer to peer lender, lend to the peer
Ensure the peer to peer lender has skin in the game, (investment in the loan) and other risk protections
In a recent article in the Australian papers, a regional bank made an unusual statement that depositors lend them the money not individuals.
The comment seems very naive in that I cannot imagine that majority of depositors see that they are lending money to them. Is this correct, as we saw through the GFC the majority of depositors were surprised to find that banks had used their money to invest into assets that were risky and considerably riskier than the perception of what the bank risk profile was.
The whole concept of peer to peer is that you lend to your peers, and it is the fact that the internet enables you to lend to strangers with protection, that is how peer to peer lending works.
If you find you are putting money into a fund, a managed investment scheme or debenture scheme, well then, you are not lending to the peer but to the peer to peer lender.
There is a lot of hype about peer-to-peer lending in the market in the Australia market at this present moment. However what seems to be missed on a number of occasions is an explanation how the peer to peer lender is invested in the business.
What I mean by invested is what loss position they take in the event of a failure of the loan. In a recent interview, the interviewer send to me “well you don’t need to worry about what happens in recession because you won’t suffer any losses as you are just the service provider”
My response to him was you’re incorrect in Marketlend we do invest with the investor and taking first loss position.
The lessons learned through the global financial crisis, and any other crisis has been that those who have invested in the investment that they are also offering to others have a lot more tenancy to ensure that there is a realisation or return of those assets in such scenarios.
Commonly called “skin in the game”
So when you’re looking at a peer-to-peer investment, ask yourself is what skin in the game does the peer-to-peer lender have.
And this isn’t :
- the investment that they’ve made to build a business
- the provision fund where they’ve held money back from the borrower which is the investors money that is used to set up a provision.
- What it is – The money have they paid in themselves to take losses if such an event.
Now there has been some claims by peer to peer lenders that they have a loss provision, so don’t worry.
Ask the following questions:
- How are the loss provision funds obtained, what is the source of the money?
- If they are from the borrower, is it the money you gave the borrower and they are taking a piece of it. If so well then it is your money at risk.
- If it is from the margin to be paid to the peer to peer lender, is it a cost that is being added to you? If so then again it is your money.
- Is the loss provision for each individual loan or for the whole pool of loans. If the whole pool of loans then be wary, because if you are carrying the risk of not only your loan but the others in the event of a default, and there may not be enough left to pay you if the other loans default at the same time.
It’s a brave new world in the investing in peer to peer lending, and it can be a happy one, but while times are good and the best system with the speediest processing might attractive when times are tough it is the risk protections that will make a difference whether you get your money back.
So make sure you pick a good balance between systems and risk protections.
At Marketlend, we invest in every loan and also offer insurance protection to investors if they choose.
Every loan has paid on time, and an average of 12% loss protection has been provided on each loan