Mintos cashback vol 2

A bit more than a week after last Mintos cashback bonuses were paid out, another cashback program (actually two of them) was announced. Since I’ve seen some investors seem confused about the value of such a program, I thought I’d discuss it a bit. So, why offer a cashback?

  1. The obvious – bring in more money

As I predicted in my last post, the cashback pushed people to deposit more money, Mintos finished December with 46,9 million euros worth loans financed. This means more money for Mintos instantly (since they earn money based on the volume of loans financed), and a bigger growth push for them (since people who deposit money will not withdraw it instantly after the program is over).

2. The less obvious – encouraging long term commitment

I personally know a lot of people who invest in Mintos but only choose short term loans since long term loans seem too scary. What better to help people overcome mental hurdles such as this (taking on more long term risk) than extra money? Once people have dared to invest into longer term loans once, then once they have them in the portfolio it’s easier to add more long term loans (If you’ve already taken in 60mo+ loans then some more 12+ month loans seem less scary than having to “jump” from 1-3 month loans).

3. The practical – the money remains in the portal for a bit at least

Once you’ve invested into long term loans you can’t just instantly jump out again. Either the loan has to finish (take a long time), it has to get bought back for some reason (unpredictable) or you have to sell it on the secondary market. To sell on the secondary market someone else has to buy it – meaning other investors are likely to bring in more money. Or, if you’re in a hurry to get out then you’re likely to sell at a discount, and everyone is happy (other investor gets investments cheap). You can already see people selling BBG loans at a discount after having cashed in their discount.

4. The logistical – easier to manage

If an loan company (or Mintos) wants to increase amount of money from investors then logically you would have to increase interest. For long term loans a slight increase in interest is problematic since for a long term loan that comes to a large amount of money. If you list loans with the same interest rate as before, but offering a cashback it’s easier to manage (get to predict volume) and investors are less frustrated if loans get bought back later. It’s also more instant – increased interest rates will not motivate people to make deposits as quickly as a time-limited cashback offer.


 

Overall, since I’ve been investing into mogo loans for most of my Mintos career then for me the buyback is a nice bonus to have. I even sold some older loans at a bit of a discount to benefit from the cashback (I was interested to see that people were actually buying!). Some people are probably still a bit too scared to take in such long term loans, but, well, more left for those who pick them.

Mintos cashback program

It seems like Mintos is growing at such a rate that they need more investors’ money and therefore they are offering for the month of December a cashback program for investors willing to invest into long term loans via the primary market.

As someone whose portfolio in Mintos mostly consisted of long term loans (mostly mogo) anyways, then this is not a particular hardship to take part in – the cashback offers 2-5% cashback depending on the length of loans you are willing to put your money into.

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You can already see the effect this promotion is having by the fact that a) the primary market is pretty empty if you go looking for 60+month loans and looking at the stats for the whole month then half way through the month, Mintos seems to be on track of 45-50 million euros worth of loans being funded. Essentially they are reaching a point where through Mintos as much money is invested as through most other Baltic P2P portals, so super impressive for them!

Looking at the amount of money invested, and assuming maybe half of it would be invested into loans which qualify for the program (since there’s plenty of people who still wish to have only short term loans) the expense for the cashback I would assume, would run somewhere into the range of a couple of hundred thousand to half a million euros to be paid out to the investors.

I’ve also added a bit of extra money to Mintos this month, and will probably add another top-off to benefit from the cashback offer. There are a lot of interesting aspects to this offer, I assume at least some investors will be selling the loans they invested into on the secondary market once the program is over, so I’d expect it would be reasonable to stock up some cash to pick up bbg loans which are on sale on the secondary market at the start of January.

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For my portfolio it’s a nice boost to have, probably in the range of 50-100 euros max depending how much I deposit extra, but a nice Christmas present overall. The cashback gets paid out within a week as well, so if you invest now, then you’ll have time to reinvest the cashback amount as well after it’s deposited.

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If you start investing in Mintos now with a referral link, you’ll gain an additional 1% off your first 90 days of investments.

Factoring Q&A from Investly’s investor event

Yesterday I attended Investly‘s first ever investor event. The goal of the event was to give investors a clue as to what’s happening with Investly and to probably create a bit of hype about factoring being released.

(Before I go further, I’d like to point out that these kinds of events are good marketing and go a long way in terms of creating goodwill towards a business! Even though it was somewhat chaotic, in a world where everything is digital, investors still want to see the people they’re trusting their money with!)

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What is factoring?

Essentially factoring is one company selling its invoice to a third party to receive funds early. For example business A does a service for business B and bills them for x amount of euros, with a 3 month deadline to pay. The problem being, business A needs the money quicker than 3 months – therefore they sell the invoice with a slight discount to a third party and get the money instantly and the third party gets paid by business B once the deadline has arrived.

Generally in this scenario business A is a smaller company who needs to manage their cash flow and business B is a bigger company where the wheels turn very slowly. For an investor this means they put up the money to buy out the invoice from business A and get compensated once business B pays off the bill when the actual deadline hits.

Factoring by Investly Q&A

At the event Siim Maivel (CEO of Investly) talked a bit about their plans for factoring and the people got to ask questions about how it’s set to work. Since it’s a completely new product then it’s important to communicate all the potential risks of this type of investment. (This is my personal summary based on the discussion, not a word-for-word transcript, so keep an open mind).

Why factoring?

  1. Multiple businesses were taking out loans from Investly for the purpose of managing their cash flow. They might as well have been doing it with factoring instead of taking out a loan.
  2. Investly tested factoring as it currently is on the market and concluded that it’s a product that’s too complicated as-is, getting factoring from a bank requires too much legal knowledge to make it viable for most small businesses.
  3. Factoring will start off in a closed beta – the system is ready and new investors will be let in based on a waiting list to test the scalability of the system.

How will fraud be detected? (the fake invoices problem)

To start, in addition to thorough background checks for both businesses to prevent issues there are minimum requirements to qualify for the service. Initial estimate is that the business will have had to report for at least 1 year of business, and have about 30-40k of cash flow per year.

What are the expected returns? Minimum invoice size?

Returns will be based on the sales discount, which is likely to be 1-2% for 30-day invoices and 2-4% for 60-day invoices. (On a monthly basis). This will include Investly’s fee as well, meaning that less than 1000€ is probably unreasonable to take into work.

What’s the potential market for this?

So far they’ve had a “sign up if interested” mailing list working on their site, and the interest has been ‘big’. Siim claimed that in England, 90% of the businesses who use factoring have not used it before due to difficult access, making the potential market bigger than current factoring market would imply.

How will defaults be avoided?

  1. If a ‘client’ defaults due to fraud, despite Investly having done due diligence, ordinary debt collection processes will start.
  2. If the client fails to pay due to a bad financial situation – Siim estimated this to be unlikely due to the company towards whom the invoice is placed is likely to be a bigger company and be less likely to suffer difficulties.

How quickly will the funding process work?

Due to the short term aspect, speed of processing requests is important. Hope is to do it in a day or two, future automatisation is planned, but currently not at the top of the list of developments.

What could be the monthly amount of invoices processed (is a 100K invoice likely to get funding)?

Currently there aren’t enough investors to probably work with such big sums. There are talks with anchor investors to get the initial ball rolling, so hopefully reasonably sized invoices will not be problematic.

What/who is an anchor investor?

Someone who can invest more than 100€. (Meaning, this isn’t an actual ‘status’ that gets perks of some kind at this point.)

Is there a limit for participation per invoice (can one person buy up a 3000€ invoice for example)?

Currently no such limit has been set. If the demand for a specific invoice is big, then the auctioning system will actually end up increasing the purchase price, making it a better deal for the company selling the invoice. (Apparently there’s a lot of complicated math behind it).

Would partial sales of an invoice be possible?

Not at the moment, not enough reason to put in the work for it. Would be easier if someone just split a bigger invoice into multiple smaller ones if a partial sale is important. (For example bill 2x50K instead of 100K if they just want to sell half.)


My personal opinion is that factoring as an idea is a great product. As a small business owner, I am familiar with cash flow issues, especially if you don’t have too many clients. The theoretical market share could be quite big, provided that they get the pipeline going, and manage to get enough investors. Since a lot of the invoices are relatively short term, it’s not as capital intensive in some ways.

I’m interested in how the IT system holds up and how the auctioning system will work, so I hope for more detailed information on that in a bit. Overall, it’s good of them to try to expand, since they’re tapping into a market where they have almost no competition. In some ways that’s good, in some ways problematic since they have to put a lot of effort into making sure everything works as it should.

Estateguru portfolio status, 3 months

A while back I wrote that I took a look into Estateguru as an investment opportunity due to wanting to both diversify and perhaps move a part of my lending portfolio into real estate backed loans. Since then they’ve slowly gotten their pipeline going and there is new projects happening every now and then.

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What do I like about Estateguru so far?

  • While the interface and web page could be smoother, all numbers and transactions are clearly visible and I’ve had no issues so far trying to find information and failing to. (Looking at you here, Bondora!)
  • There’s a reasonable amount of data on each investment and there’s enough projects moving currently to have hope of not much cash drag happening.
  • The loan terms are short, meaning that the lack of a secondary market at the moment isn’t as big of an issue as it would be if the investments were 3+ years.
  • I don’t need to log on often to keep track of what’s happening – in that sense it’s way more passive than some other investments I have. (I trust they won’t make any big changes without previous info.)

Portfolio plans?

I’m currently a bit torn when it comes to my plans for Estateguru. Due to the short term of the projects, it doesn’t take long to create a kind of a cycle of investments. (It’s shorter than with Crowdestate for example). This means that in theory out of all my investments Estateguru is closest to a classical CD ladder (A strategy in which an investor divides the amount of money to be invested into equal amounts to certificates of deposit (CDs) with different maturity dates.), with markedly higher interest though!

This means that I’d have the option to keep investing 50€ per project (the minimum), until the year comes full cycle (next July) and then re-evaluate whether I want to increase the sums that I invest or keep them at the same level and lessen contributions. (Since you get interest paid, then for every next 50€ investment you need to add in less of your own money, and just reinvest the returns).

My current plan is to keep to the minimum to slowly diversify my portfolio and then re-evaluate after like half a year. There is always the question of what happens if a project defaults and issues arise or how many projects they’re capable of bringing out to keep cash drag to a minimum. Definitely they seem to have hit the ground running and are doing well enough that I’d dare to give them more importance in my P2P portfolio.

*’If you feel like starting to invest with them, then using the promotion code EGU05422 will cash back 0,5% of your invested amount to both yourself and me as the person who referred you for the first year of investing.

Are people who take out 90% loans stupid?

While the title may seem a bit harsh, this is the reality of what many people think – if you take out a high interest loan then there are very few reasons to do so, the top one being that the person taking out the loan is just plain stupid. Is that the case though, or is that always the case? If so, why are 90% loans even legal?

Maximum interest rates by law

Estonia is currently in the process of regulating maximum interest rates for loans. As it stands, the maximum is to be set at 3x average consumer credit rate, which makes the cap out to be at just about 90% interest. For any investor, 90% returns would be in the realm of magic, which is why such an interest rate for loans raises a lot of questions, why would anyone take out a loan with such an interest rate?

Loan eligibility

The answer to the question of why anyone would take out such a loan is easy – they aren’t eligible for any other loans. It seems some people (often investors) forget, that the majority of the population isn’t as well off as they are. Whether or not you’re credit worthy depends on many different aspects, and once you fail too many criteria it’s easy to see the interest rates climbing.

Having a low paying (or minimum wage) job, living outside of the capital, having multiple children, not having enough education etc. are all warning signs for creditors that increase your risk levels exponentially. While most people who have their finances in order can easily enjoy the chance to take out 9-12% consumer credit loans when necessary they are definitely a minority in the population.

This is one of the reasons why I’m in favour of capping interests, but against outlawing things like SMS loans for example. In Estonia, SMS loan has more than 100 000 customers! They are clearly offering a service that people need (and I agree that it’s super sad how many people need the service!). However, if we ban the service, what will people do? Steal? Get illegal loans from someone? While we can and should educate people, just cutting people off from money when they need it is not a good plan in the long run.

How bad are 90% loans?

Many people (rightly so!) believe that 90% loans are super expensive in terms of interest paid in the long run. The problem being, most people don’t really assess their loans in terms of the ratio of interest vs principal but they look at the monthly total payment. If they can afford the monthly payment then everything is OK, despite the fact that the interest rate might be insane.

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I made a chart that shows monthly payback sums for a 1000€ loan with various interest rates for 1 year and 3 years. While you can see the totals climbing at an alarming rate, you don’t see the steep growth for monthly payments – every 10% of extra interest only increases the payment by about 5-6 euros. That’s not enough to make people really consider not taking out the loans.

How to fix this?

As boring as the solution is, then more financial education is the way here. How effective that would be, is however, questionable. The high interest loans are theoretically OK as long as people are capable of making the payments.

The problems arise when people miss payments, and the interest and penalties start stacking up at an alarming rate, causing the situation where the interest owed is multiples of the original principal payment. That’s when we have a problem that has caused tens of thousands of Estonians to default on loans and the law has failed to protect them from their “stupidity”.

However, it’s not just stupidity that’s making people take out high interest loans – it’s lack of financial awareness, its difficult financial situations and a lack of emergency funds and living from pay-day to pay-day, all of those not as easy to change as we’d wish them to be.