As of last night, Bondora took the first step to push the new credit system live. As of now you can see the old scoring (ABC600-100) alongside the new scoring system (AA A B C D E F HR) on the market. Leaving aside the fact that the update broke a significant part of the functions accidentally and removed some on purpose, how does the new scoring system impact investors?
Tauri’s visualization of the link between credit groups and risk
Automatic vs manual investing
For those investors who have always invested automatically using portfolio managers very little will change. If you ran a very conservative strategy, which is likely if you have a small portfolio, you can just accept any general portfolio manager setup that Bondora offers you and you’ll be set. Investing will be just as passive as before, and you’ll end up being safer from risk than you are now.
For those like me who do a part of their investing manually and run portfolio managers that are a bit more high risk than the default ones, more is going to change. Firstly, the returns for active investors will likely drop because more market inefficiencies will be eliminated. Secondly, investing will likely become more passive due to less need to scan through data provided because the new system works on partially hidden data, which means that any analysis you are running will be insufficient. Thirdly, there is definitely a lot of potential that once the new scoring is finished, that our portfolios might prove to have some very dangerous combinations of loans, such as a huge portion of HR loans.
Different process of analysis
Due to a lot of data being hidden, then it will be up to the investors to trust Bondora to rate the loans well. For example, if you look at the top 3 Estonian loans listed by potential returns onthe market right now, this is what you see:
12.73 return – HR (A600 unverified – 38%)
9.87 return – B (A1000 verified – 15%)
9.3 return – C (A1000 verified – 15%)
Now, if you look at the 3 worst Estonian loans listed by potential returns on the market right now you see something equally confusing:
0.43 return – HR (A700 income verified – 34%)
1.44 return – HR (A600 unverified – 38%)
3.56 return – D (A1000 verified – 15%)
When looking at such comparisons, it’s clear to see why you need to be able to trust the sytem Bondora made. Just looking at the potential interest or credit group is not enough to be able to predict the risk group a loan falls under. Looking at an ordinary A1000 loan, the different risk factors that Bondora takes into account can make it fall under B, C or D rating while the interest and income is the same, but potential returns for those examples differ by a magnitude of 3 times. Same for the two A600 loans – they are both the top and bottom performers listed on the market currently.
Long term impact
– Social lending will likely become more more passive (at least for me personally)
– Returns will even out for investors (since the rating system should be more transparent)
Other than that, it’s difficult to predict that might happen. The new portfolio manager hasn’t been rolled out yet, so we don’t know exactly how much freedom we have when setting it up (such as, whether you can limit your investments by potential return or just by credit group or by whatever combination of other data.) Whichever way it goes, the new year will start with a lot of portfolio managers being created.