Fraudulent loans in P2P – Omaraha example

One of the inherent risks of the lending business is the likelihood of fraud happening. People will always be motivated to try to get loans and not pay them back, and this isn’t something that’s limited to P2P – banks and other credit providers constantly try to improve their systems to stop fraud from happening.

However, when it comes to P2P a lot of portals have been rather tight-lipped about giving out any actual statistics for loan fraud, which is strange in the sense that it’s unlikely that no fraud has occurred. I remember from when I started out with Bondora, then the forums occasionally discussed some fraudulent applications, since back then it was possible to track the people you gave loans to because a lot of the borrower’s info was public.

Since then, when looking at Bondora defaults, then for quite a few you can see marked as “criminal proceedings started”, which implies fraud, whether it was giving false data, using someone else’s ID etc. For an investor this means that unless you are phenomenally lucky then you will at some point lose a bit of money to fraud.

Omaraha, the Estonian P2P portal had an interesting case happen, which hasn’t gotten a lot of attention, and to be honest if people weren’t diligent about their portfolios then I’m not sure if it ever would have been public info. Essentially, there was a dozen or so loans that were given out to Latvian borrowers, which in all likelihood used either fraudulent data or some other tricks to get through the system.

Obviously, it’s reasonable for Omaraha not to give out exact details which workaround was used to trick the system, but the fact being – in the range of 50 000 euros (+/- 10K) was lost to this one wave of fraud. Due to the way Omaraha’s system works, 80% of that will be absorbed by the recovery fund, and 20% will be lost for the investors. I was one of the people who managed to get lucky and hit quite a few of those loans with my autobidder, so I’ll be taking a loss in the range of 100 euros from this venture.

Now, why this is important other than the fact that it’s of course sad to lose the money; is the fact that this is an inevitable part of investing in to loans. No system is absolutely foolproof, and workarounds will be found. As an investor it’s your job to take that into account when planning your strategy  – the knowledge that at some point such losses may happen. For portals this is always something that would be nice to transparently explain, to provide investors with more confidence in the due diligence they do.

Twino BBG vs PG loans

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Twino has made an update in the loan product lineup they offer for investors, adding a new loan type “payment guarantee” to the previously existing “buyback guarantee” loan type. So what is the difference between the two?

As an investor…

For an investor payment guarantee allows for slightly more stable cash flow. Essentially when you used to invest into a loan, and it got delayed then the payment was made late when the BBG triggered. With the payment guarantee the idea is that the interest payments would always be made on time due to Twino taking a role in ensuring the payback. I’m honestly not sure how much of a difference it would be for most investors – the delay for BBG loans isn’t really that long most of the time.

However, this might be something that might encourage investors to lock their money into longer term loans since Twino is ensuring that regular interest payments happen. I’ve been allowing longer length loans into my portfolio for a while, and had no issues (a lot of them get bought back anyways, so there was no reason not to allow them in). Question now being though, which loans will be listed in the future with payback guarantee and which ones with buyback guarantee?

Another issue in addition to the potential loan lengths offered is the interest rates. It’s clear that the interest rates offered by Twino currently are a bit off, in the sense that there isn’t much difference between the short term (1 month) and the long term (24 month) loans. Payment guarantee is a potential tool that might allow them to differentiate between the two loan lengths, which is likely to result in the 1-month and other short term loan interest rates dropping (down to something like 7-8%).

As Twino…

The main benefit I see for Twino is twofold. Firstly, by encouraging investors to lock in their money into longer interest loans, it will allow them to manage incoming cashflow a lot better instead if having to rebalance it every month. I mean, as a CFO it must be much nicer to see steady predictions for the next 12-24 months instead of the next 1-3. Currently P2P investors are rather fickle, and switch between portals rather quickly.

Secondly, as mentioned, the potential interest rate drop. We’ve been seeing some testing on lowered interest rates in the previous weeks already, and clearly this trend is likely to continue. Since it’s obvious that there is enough of a supply of investors on the site (as evidenced by the fact that a lot of investors have cash piling up), then it’s reasonable for them to not overpay but to test what’s the sweet spot where they get enough financing, but don’t stop losing investors.

So the question is…

How long are the payment guarantee loans going to be? If they’re long term loans then it would make sense for them to keep their interest rate.

How high is the interest rate going to be? By providing investors with an extra layer of ‘security’, investors might be more relaxed about lower interest rates.

I haven’t managed to catch any payback guarantee loans on the market yet, but it’s definitely something to keep an eye on as they start appearing on the market since they might show an insight into future interest rates.

Twino and Mintos, 1 year summary

I accidentally discovered that it’s been about a year since I started investing in the two Latvian P2P portals – Mintos and Twino. While in the beginning, I was mostly testing them out as a potential alternative to the Estonian Bondora, then a year later the situation has changed – I’ve fully exited Bondora on both my private and business portfolios and Mintos and Twino are steadily trucking on as the 3rd and 4th biggest P2P positions, providing steady interest returns with very little hassle.

Good sides:

  • Both Twino and Mintos offer impressive volumes (finishing December with 14mil and 18mil of loans originated, respectively), meaning that for most investors it’s not difficult to employ their money – with reasonable conditions it gets fully invested within an hour.
  • Steady communication and development have positioned them both as relative flagships on the Baltic market, inspiring several other followers (I’ve lost count of the amount of buyback based sites that have popped up recently).
  • Geographical diversity for loan originators provides an easy chance for investors to reduce risk by investing into loan markets other than their own (through OR I’m heavily invested into the Estonian consumer loan market already).
  • Easy-to-use and generally understandable interfaces and reporting systems make keeping track of your investments and changing settings relatively easy (unlike some other sites).
  • By far the most liquid part of my P2P investments, making it easy to cash out rather quickly if in need to reinvest somewhere else (so works as a good place to keep your “cash” position).

Reasons to worry:

  • Quick development also means effort of keeping track of changes – Mintos has gone through a lot of legal changes (relationships between Mintos and originators have changed) and Twino has gone through a full structural reform (with Finabay renamed to Twino and the structure flipped around).
  • Hands-off model also means lack of significant info on the risks of originators and potential losses; this being particularly true for the non-buyback loans which both have started to offer.
  • Sometimes problematic unannounced changes, which have got some deserved negative feedback from investors (mostly unannounced and not well communicated interest changes).
  • Influx of investor money means reduced returns long-term, with interest rates having averaged lower already within the year (while still remaining relatively high).

Overall I’d say I’m quite pleased with both these picks. In my portfolio they are the closest to a near-cash position that I have, and while I don’t focus on actively increasing the positions, then I add in 50-150 euros monthly, keeping them on track of hitting a combined 10K value within the not too distant future.

I’d definitely like to see how they manage with increased investor demand (since the longer the history the higher the trust, but the more money available the lower the interest rates), and hoping to start see some solid numbers on non-buyback loans (rather much like gambling to pick them up now without any significant recovery history to speak of).

Average returns in Twino and Mintos

If there is one topic that investors get passionate about, then it’s returns. Looking at the current economic climate, then P2P returns are clearly quite good, but the somewhat downwards trend you can see happening is clearly causing dismay among investors.

Way back when, when I started investing in Bondora, it was completely possible to get 20% returns yearly due to the fact that the market was both new (therefor high risk), and pricing was vague at best (due to lack of precise credit models). However, in the recent few years the industry has clearly evolved to be more mature and less inefficient, bringing to investors loans with buy-back guarantees, which at times might have left beginners the impression that there isn’t much inherent risk left anymore when it comes to investing into P2P (which is clearly not the case).

The two favourites of the recent year or so have clearly been the two Latvian portals – Mintos and Twino, which offered large loan volumes with buy-back guarantees. For a while the interest rates were high enough that many people were a bit confused as to why the rates were that high, and were sure that the rates would be dropping in the near future.

It seems that we are somewhat starting to reach the point where returns will not be as high as they were anymore, and this is of course both good and bad – for investors who enjoy higher risks, the reduced returns are of course bothersome, for more conservative investors the lowered level of risk will of course be more appealing.

Twino

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Twino has already gone through one attempt to reduce the interest rates, which caused significant uproar among investors. They attempted to drop the interest rates to 10%, which caused investors to reduce their investments, which made them increase the rates once more, but they are still not back to the point where they started at (they used to be 12,9% & 14,9%; however now are 10-12% & 13% respectively.)

This means that while it’s still possible to generate >10% returns, then looking at the loan volumes they process the question arises – for how long? Since Twino is closing in on 10 million loans funded per month, then clearly there is enough investor money to go around, meaning when the higher interest loans run out, then the lower interest loans will get funded as well. Once enough get funded regularly, it would be reasonable to expect a drop in the rates.

Interestingly enough, a lot of investors in Twino seems to be super cautious about the longer term loans (24 months), which in my opinion seems a bit unfounded – largely because 1) they are resellable 2) a large amount of them get bought back early, meaning it’s not such a big commitment.

Mintos

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Now, with Mintos, the dynamic for the rates is a bit more complicated since different loan originators balance the interest rates between what they themselves believe to be fair and what the other originators are offering. This so far has caused a sort of a hierarchy to form between the different originators, meaning some loans disappear from the market very quickly (or get marked full by autobidders) while some remain “waiting” on the primary market.

While there have been fluctuations here and there between the interest rates offered, then it’s clear to see that the amount of loans with a buyback guarantee has been slowly but surely decreasing, meaning that investors are forced to do some more in depth analysis to figure out whether or not they should include lower rate buy-back loans or higher rate ordinary loans, which is rather complicated to do due to the lack of public information about the loan books of the originators.

Future of returns

Twino and Mintos do not exist in a vacuum – the amount of investor money available is dependent on the amount of projects listed on alternative sites and the returns offered there. However, if you look at the average returns offered by other portals, then >12% returns will be more and more unlikely as time goes on.

Just looking at the Estonian portals available, then Estateguru historical returns are <11%, for Bondora they have said they wish to hit 10% returns, for Investly the returns are <9%. Higher returns are offered by P2P portals which include more risk or a more complex model (Crowdestate for example inherently has much more risk, Omaraha’s premium for returns makes sense if you consider the fact that they have no proper exit mechanism available and the learning curve is rather steep).

It’s of course difficult to make predictions about the future, and how the markets behave, but I do believe that we are likely to be hitting the downwards slope of returns, which will in the long run bring us closer together to US/UK/Central European returns for P2P portals.

On the one hand this means a bigger faith by investors (investing their money at a lower rate), and a reduced risk rate (due to growth of the whole sector), on the other hand this will signify lower returns, and higher efficiency on the markets, meaning the >20% returns several investors have achieved are likely to be in the past. As someone who does believe that the effort/risk vs returns have been off balance so far, the returns lowering a bit is not an unexpected development.

Twino and Mintos portfolios, 6m

The great Latvian face-off! How has it been going? Time to take a look.statustwino

Twino

So, when it comes to Twino the original plan was to have short term loans only to balance out the fact that most other of my investments are long term (such as Bondora and Omaraha). At start it was working well, but Twino has been playing around with interest rates quite a bit, so I’ve adjusted my plan a bit and ended up investing into longer term loans (since they offer 13% interest at the moment) and keeping only a part of the portfolio in very short term loans.

The interest difference of course isn’t that much, but realistically the likelihood that I would have to take out all of the money quickly enough for it to matter is small enough to be probably quite irrelevant. If I just need to cash out quickly then there is a somewhat functioning secondary market, and I’m keeping enough money in cash to not really be worried about the slightly reduced liquidity. Overall, I think they’ve managed to find a place in the Baltic P2P market and will prove to do well in long term too.

Mintos

statusmintosNow, when it comes to Mintos, then I buried my plan of investing only into short term loans way before I did with Twino. I do have two autobidders running, one of them catching shorter term loans, but with mogo offering 13,5% with buyback as well, there isn’t really too much of a reason to diversify that much across different loan providers (especially considering the fact that I have investments in other portals as well). So if I look at the balance of my portfolio right now, then about 75% of the loans are mogo car loans with long deadlines.

When it comes to the volume, neither Twino or Mintos have had issues. Whenever I add more money, it gets invested in minutes, and I can see why a lot of people who start on either of these sites don’t really feel the need to diversify across too many more portals. Overall if I look at the 5 core portals in my P2P portfolio, then by portfolio value the division would be Bondora > Crowdestate > Omaraha > Mintos > Twino. A couple of months ago the first three were trailing ahead quite a lot, but I’m letting the last two catch up since I think they’ve both proven their value in both the volumes provided, with transparent data & expansion plans and just overall great communication. To sum up, I’d say that they have both been worthy additions to my P2P portfolio.