Having invested into Bondora for almost three years now, and having seen many radical changes happen over the course of that time, then yesterday’s announcement about both the primary market and secondary market being phased out to be replaced by either completely passive PMs or a more active chance to build your own API, the question arises – what exactly is Bondora moving towards?
What is alternative finance at heart?
In the recent (I’d say 7+) years information technology has finally reached a level where it’s possible the radically disrupt classical business models via technological solutions. Most know examples of course being AirBnB and Uber, Transferwise, even Google as an overall idea and many others.
Fintech in that sense has been an interesting field to follow since at heart, innovation in the financial industry is mostly limited by how creatively you can find wiggle room between different regulations that try to stifle your growth and business model.
Quite a lot of new innovations have gone with the model of “It’s better to ask for forgiveness than permission”, and Uber is perhaps the best example of this in many ways due to actually being declared illegal in some places due to what amount to essentially cartel agreements that exist in the taxi industry.
For fintech, this has meant that many of the startups have started out being not regulated since they don’t fit into a traditional mould of what a credit institution should be. This is why many fintech start-ups first test their business model with a minimum viable legal work to see if it’s reasonable to pour money into actually working with all the regulations that will start pressing in from all sides once you’re a “real” business.
Bondora is one such example – they started out small enough to not be regulated, and now that they’re big enough certain steps need to be made. The first one was probably being voluntarily regulated by the UK financial inspection, but this was likely only a first step on a long path to the new Bondora business model.
What are the new changes about?
While the information so far has been vague in terms of what will happen (and when), then essentially Bondora will move from a one-time heavily individually (actively) managed investment to a more passive form, closer to a fund than a loan market in terms of how it’s going to work.
Now, where this gets interesting is if you follow what Bondora has been doing recently. Clearly they have done a pretty clear 180 from what they promised several years ago – more transparency and more tools for an investor are nowhere in sight, things that were heavily emphasised a few years ago.
Why the sudden change of heart? Bondora will probably never actually explain anything (since they never do), but it’s likely that this change will pave way for a bigger influx of institutional investors due to how much smoother it will be to use for portfolios that invest significant sums of money. Why institutional investors? – The reason is simple, small scale investors are unable to provide the money for expanding to new markets.
In some ways a more Lending Club-ish method of investing wouldn’t necessarily be bad, I mean it works for LC. Investors don’t really own the loan pieces, LC does, and you essentially buy a “bond” with expected returns. While this will likely drop overall returns, it should in theory also reduce risk. However, the success of their model is still heavily tied to the quality of their clients, so as long as they can guarantee that, then for the investor theoretically there shouldn’t be much difference in how the actual interface works.
Another key thing to keep in mind here, is that Bondora is in the process of getting a banking license. Pärtel mentioned this as well at the Opinion Festival, but it’s a move that makes sense if you want to ease your way into the big players, since the way banks are regulated is in many ways simpler than the (legal) loops that alternative finance needs to jump through. The recent announced changes certainly align with becoming a more “classical” type of business.
*I wanted to write a bit about the api as well, but there isn’t enough information yet. I truly hope they don’t accidentally make a Forex-like system though where you have to pay money to third parties to have the best chance to invest. Especially since most retail investors will never be able to compete with institutional investors.