Huge updates to the business model of Bondora

Just when things were looking reasonably calm and settled, the new legal regulations that came into effect on March 21st pushed Bondora towards finally announcing their change of direction – from being an intermediary to being a credit provider.

What has changed?

In essence the situation now works like this – when a client wants to get a loan then  this loan is initially given out by Bondora, and then the pieces are sold to individual investors. Essentially what this means, is a move towards a more Lending Club like model – that investors purchase the right to a claim (which they’ve been actually doing for a while already, but now there seems to be some legal alterations to the process). Overall, the biggest change by far is the fact that Bondora now announced that due to their change in legal status they will be keeping a part of every loan in their own balance sheet. The definition of ‘part’ has not been announced but this has some impact how to assess risk.

Bondora now has ‘skin in the game’

While before, owners of Bondora also invested into loans (the CEO, Pärtel Tomberg, said this amounted to 1,2 million € worth of loan pieces, amounting to a total of about 3% of the portfolio), now Bondora as a business will also be impacted by the quality of the loans. In theory it does two things – firstly it somewhat increases the strain on the finances of Bondora; secondly it ties them more directly to the quality of the loan book.

It’s difficult to assess the long term impact of this. In many ways Bondora is now moving towards the model that several loan originators that list their loans at Mintos are using – keep a % of the loan in their loanbook and sell the rest. In theory it should be good overall. Also, this was a predictable change in their business model. In the long run it’s probably a stepping stone towards a full on banking license. This change would also allow to start some kind of securitisation based on the existing loan book, but there is no info so far on this.

Changes to the recovery process

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Now, a much bigger change that was announced was more a aggressive debt collection strategy that outlines a new process where DCAs are to be involved in the process as early as 7 days into the collections process. This has predictably caused a serious uproar from some investors due to the fact that DCAs apply fees on money that they collect, reducing investor returns. One of the key questions that has arisen is the question of whether 7 days is a reasonable date for becoming more aggressive and whether waiting a bit further to verify increased likelihood of bankruptcy would be reasonable.

Now, the initial reactions seem to be very emotion based, and I’ve kept myself from making any rushed judgements. A lot of investors seem to consider this as a large loss without considering the fact that once DCAs take over collections they do not keep at it forever – if a settlement is reached the client keeps paying and further aggressive collections is not needed. Another issue that there isn’t much info on, is the rate at which collections happens – the main issue with court collections is that the time delay is immense, often more than a year before anything happens; for DCAs the recovery is clearly much quicker. Overall I’m expecting to hear more information on this before making any long term decisions.

 

P2P and investor communications

One of the main reasons why P2P has been able to evolve so quickly is the Internet – you are able to provide access to investments to people with ease, removing all the pesky time consuming elements of real life interaction. Theoretically this should also mean ease of communications – access to information should be unlimited and all investors should be happy. In theory this is the case, in practice investor relations seems to be a rather vexing problem for many P2P sites.

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What do investors want?

You would think that this question is not really that difficult to figure out when it comes to investor relations. The key things most investors want to know – what is happening to their money, are there any changes/risks they should be aware of, and they want live updates for the current situation. However, in the past month there have been many communications disasters, that others should surely learn from. I’ll go through some of them to explain what I mean.

Twino will-they-won’t-they interest debacle

A while back the Latvian P2P site decided to drop their set interest rates from 14,9% & 12,9% to 10%. The announcement was made rather out of the blue and went into works the next day. Not good – people need to know things in advance. Today, however, after two weeks of hassle (suspiciously sudden buy-backs, their IT system currently miscalculating interest / xirr), today they announced that some loans will be back to 12% interest.

Out of all the things that investors do not want, number one is uncertainty. If you make decisions – let investors know (enough time in advance!), and explain thoroughly why you are doing something. Overall, they received the ire of many investors over the recent troubles, and it will leave a mark on their reputation.

Crowdestate server meltdown debacle

As crowdfunding real estate has reached new levels of popularity in Estonia, therefore from previous server issues it might have been reasonable to assume an epic server meltdown was in the cards for them. As it stands, with the newest project they listed the servers died even before the bidding started, which resulted in a full 3-day delay while the IT team managed to fix the issue.

Overall, a server meltdown is excusable, since they probably didn’t assume that such a level of popularity would reached so soon. However, the bigger issue here ended up being the fact that the communications that accompanied the problem lacked severely, and even though many e-mails were sent out (eventually), then once the project was reopened, then it was reopened before the announced time (has happened many times), therefore a large amount of interested investors were left out, which caused further displeasure.

Invest into investor relations

While in the classical sense investors aren’t the site’s clients but the people who take out loans are, then in the long run investors have much more of a say in how any site does. Bad feedback from investors (who, for example, write blog posts), creates a lot of the external feedback that people find when they are looking for information. It’s worth it to invest into investor relations and if sites are unsure about what kind of info investors want, then asking the investors works rather well.

Recently the three sites that probably deserve most praise are 1) Mintos – they send regular press releases, talk on FB (and stopped sending e-mails 5 am after I requested it! ) 2) Investly -they have employed a full time investor relations person, who answers all sorts of obscure questions that bloggers such as myself have (for example info about legal aspects of factoring), 3) Bondora (surprisingly!) – CEO’s personal presence in the FB group, plus increased amount of newsletters and blog posts.

 

Social lending portfolio (February, 2016)

February passed so quickly that I didn’t really even have time to do much. However, despite the shortness, it was a nice growth month, with several interesting things happening on many P2P portals.

Bondora personal portfolio

Interestingly enough Bondora was by far the biggest surprise this month – after such a long time of investors complaining about all the things, they seem to have taken the investors’ wishlist and just started crossing off all the things that have piled up in the past few years. New cash flow & dashboard components allow for some interesting modelling options for your portfolio’s future. I haven’t had too much time to play around with it, but I must admit I like what I’m seeing!

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Interest returns are now slowly starting to drop (to 108€) due to the fact that I’m slowly starting my exit. I’ve transferred out my first 450€ (which is being sent to work on the stock market). I’ve also started to slowly sell parts of my portfolio that will be selling at a loss – I don’t have to take into account any taxation issues on those, and at this moment selling large amounts of loans on the secondary market is definitely not comfortable. However, I’ve started to scan through my loans and started selling off defaulted loans that haven’t really started to recover and loans that are suffer from pricing issues (old HR loans with 20%-ish interest rates). It takes some playing around with discount rates, but I’m happy with how it’s going so far. The loans I’ll sell with a premium I’ll start selling Jan 2017 – meaning the tax obligation hits summer 2018.

Bondora business portfolio

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The business portfolio is growing as planned. I’ll hit 200 loan pieces soon and then I’ll likely increase the bid size a bit. Overall absolutely no issues with money going out (I’m not using too strict criteria – just country & credit group limited). I must say I am pleased with the pricing changes since it’s clear to see when comparing my two portfolios that loans that are priced with the rating follow expectations reasonably well – AA, A, B loans are showing very good payment discipline, I hope the likelihood of defaults is also correctly determined, as my portfolio grows I’m becoming more of a fan of slow and steady.

Omaraha portfolio

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Omaraha is doing slow and steady, most important news is that there was an announcement that they’ve received the permit needed to keep functioning from the Estonian Financial Authority. Still, Omaraha has some downsides – at this point I haven’t had any loans go out for 8 days (usually the rate is about 1 loan/day). I’m wondering if it’ll start moving or I’ll have to play around with the interest rates. I like their no-hassle system but lack of a secondary market is making me balance investments between different portals, and not letting Omaraha move too far ahead.

Mintos, Twino, Viventor

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Interestingly enough the Latvian buyback triplets caused most hassle for me this month. Mintos could still use some usability upgrades, and it’s become clear that short-term investing there isn’t viable due to a lack of short term loans. However, my hopes for Twino becoming a major player in my portfolio were dashed with their brutal interest cut and some recent communication blunders. I did start investing in Viventor as well, but that’s mostly play-money at this point as they build up their reliability.

Definitely interesting choices to be made here in the near future – if the Latvians had managed to keep going as well as they were for the next few months, I think they would have wormed their ways into investors’ hearts even more, but as it stands, making decisions to divide my P2P portfolio is becoming difficult with all sites having some downsides.

Crowdestate portfolio

I contributed a small amount in the most recent CE project. A new one is opening for this months, I’m interested to see what it is. As it stands, the first round of investments that I’ve contributed in are starting to finish up, so I hope that the reinvestment snowball will start rolling at some point.

Estateguru & Moneyzen portfolios

Did not add any new money to either. Would probably exit if possible (at the very least to switch to business portfolios), but both stil lack a secondary market. At least my investments in MZ are small enough to get reinvested rather regularly. With Estateguru I’m just stacking up money to probably transfer it out at some point.