Why P2P facilitators have to have ‘skin in the game’
An un-named regional bank made an unusual statement in an article I read recently;
“Depositors lend them the money, not the individuals.”
In my opinion, the comment seems naïve, as I cannot possibly imagine that the majority of depositors see that they are the lenders themselves. The GFC demonstrated that many well-known banks had used depositors’ money to invest into assets that were considerably riskier than what the depositors believed.
Many have misconstrued the original concept of P2P lending. In essence, P2P lending is the idea that one party acts as a lender to a stranger, using the facilitators’ guarantee and research as a risk indicator. In contrast, if you are putting money into a fund, a managed investment scheme or debenture scheme, you are not lending to a peer, but you are investing in the facilitator.
P2P lending has been a hot topic recently, but it isn’t very clear what the P2P facilitators have invested themselves. By invested, I’m referring to the loss position that they take in the event of a failure of the loan.
In a recent interview, the interviewer stated that he believed that a P2P facilitator is unaffected by a recession because they are merely a service provider, not an investor. I corrected him; Marketlend always invests with the investor and takes a first-loss position.
It has been proven, over and over again, that a debt facilitator that has their own personal investment within the debts offered, has a lot more tenancy to ensure the realisation or return of those assets in a time of crisis. I refer to this as “skin in the game”.
I find that many investors aren’t aware of this, until a crisis occurs. It’s important to draw the fine line between what is and what isn’t having “skin in the game”.
Investments into their own personal businesses and provision funds withheld from the borrower, isn’t having “skin in the game”. “Skin in the game” is demonstrating that they have full confidence in the borrower, by using their own money to fund a part of the loan.
So when you’re looking at a peer-to-peer investment, the question you’ll need to ask yourself is:
“What skin in the game does the peer-to-peer lender have?”
Many P2P facilitators describe their “loss provision”. It is a very vague and undefined term, thrown around by the facilitator’s marketing consultants. As an investor, don’t be afraid to ask the following questions.
How are the loss provision funds obtained, and what is the source of this money? If it’s from the borrower, is it the same money you gave to the borrower? If it is from the margin to be paid to the P2P facilitator, is it a cost that is being added to you? If so, then it is again, your money.
P2P lending is lucrative; it is new and exciting. But like anything, make sure you aren’t exposed as an investor. It is very easy to fall into the trap of investing with the facilitator who has the fastest processing time, especially when the economy is doing well. However you must make sure you research each facilitator and ensure that that they have a loss protection program available.
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.