Income Marketplace is copying techniques used by credit funds to protect their investors
Income Marketplace is a new multi-lender P2P site based in Estonia. Yes, we know – there’s already MANY other P2P sites located in the Baltics. So what makes Income Marketplace potentially interesting for investors? The goal of the team at Income Marketplace was to structure investments in a more professional way that replicates what serious investors such as the US fund Fortress puts in place to protect their positions. The goal is to reduce the incentive and ability for loan originators to breach their legal obligations towards P2P investors. As an example, of the problems that can occur, over the last 18 months we have seen some lenders that appear on P2P site Mintos fail to forward the funds that they had received onto investors.
In our view, the biggest innovation of Income Marketplace is the securing of the loan portfolios in a way that allows them to rapidly take over the servicing of loans, and redirection of cash paid by borrowers away from the loan originators, if they default on their obligations. To do this successfully, a backup servicer needs to be in place, and the servicer needs to receive a constant data flow about each borrower. This is something that Income Marketplace has put into place. Income Marketplace also says that it has improved the position of investors relative to the usual buyback guarantees seen on other sites. How? Through what it calls the ‘Cashflow Buffer’ and ‘Junior Share’. You can read more about this on their blog. Effectively, it means that loan originators usually have more ‘skin in the game’ (% of each loan that the lender holds) than on other P2P sites. Importantly, this ownership stake of the loan originator ranks junior to the money owed to P2P investors rather than being pari passu (equal) which is more common. This helps to increase the amounts that P2P investors recover if there is a problem such as an insolvency of a lender.
What about the management team? How credible are they? The founders have a track record in this area. CEO Kimmo Rytkönen was a founder of the former Mintos loan originator Aasa, as well as a successful Indonesian Fintech lender. The other senior positions are filled by people with solid backgrounds, including a CFO from a Big 4 firm, and an experienced General Counsel. The Supervisory Board is also unusually strong for a new business of this size.
Interview with Kimmo Rytkönen, CEO of Income Marketplace
Kimmo there’s already a lot of European P2P platforms. What is the gap in the market you are hoping to fill?
P2P investing has been broken for some time, and retail investors have lost a lot of money due to platforms that don’t take investor security seriously. What we did with Income Marketplace is combine our experience from non-bank lending and institutional loan investments and implemented this into a new type of P2P marketplace where investor security is the priority.
All 3 co-founders were involved with a lender that used to appear on Mintos – Aasa/Supernova. What did you learn from that experience?
We did a lot of fundraising in Aasa/Supernova and this is where we learned how the large institutions that invest into loans like Fortress Investment Group and others do their due diligence and secure their investments. We took these learnings and implemented them into Income with the goal of making investing into loans secure also for the retail investor.
You also co-founded an Indonesian Fintech in 2014. Tell us more about that. How big is it now?
Tunaiku is the first digital instalment loan in Indonesia and is the flagship product of local Bank Amar. Amar has core capital of about 70 million USD and is the first digital bank in Indonesia. It IPO’d in early 2020 and is listed on the Jakarta stock exchange. It has been a great success and continues on a strong growth path. I have no operational involvement anymore but I’m still a member of its steering committee. Indonesia as a market has a lot of potential due to its young and large population.
Your biggest innovation seems to be obtaining the right for a standby servicer to take over collection of repayments. To do that successfully they need to have up to date contact information and payment details for each customer. How does that work?
Income Marketplace always has up to date information available on each loan and the data is shared weekly with the backup service providers. We always know the real status of the loan and can track the borrower repayments in detail as our system mirrors the system of the loan originator. Mintos for example does not know what payments came from which borrower to which loan, which I find incredible as a P2P investor.
But that’s just one piece of the puzzle. The real innovation here is bringing the institutional level security into P2P. Taking the loan portfolio as real security and setting the Cashflow Buffer enables us to recover the investor funds in case there is an LO default. This is something that is only available on Income Marketplace and was built to address the disastrous situations we’ve witnessed (e.g. on Mintos in 2020).
The loan originators on your site are quite unusual – one in Finland, one in Indonesia and one in Brazil. How did you end up selecting them to be the ones you launched with?
We didn’t plan such a geographically diversified group of LO´s as the ones we launched with, it just happened as I reached out to my network to onboard different LO´s before launch and these turned out to be the first adopters.
In retrospect, it probably would have been more cost efficient to start with one market instead of building the necessary security structures for two different parts of the world, but now that we have them in place it should be easier and faster to onboard new Loan Originators from the regions. Brazil and Indonesia are both booming fintech markets, while Finland is a mature and developed market, so I think it’s a good mix and doing the initial investments were worth it.
Does the management team of Income Marketplace hold any equity stakes in the loan originators?
Management holds around a 12% passive equity interest in one – ClickCash. I personally hold about 9% of that as a result of a seed investment when they were just starting. It’s a great company in the right market at the right time, so I am very happy that I jumped at the opportunity at such an early stage.
We’ve seen some Mintos loan originators who have failed to pass on the payments received from borrowers. How does your security structure stop this from happening? Is there any practical way to step in and take over management of the loans if needed?
Failure to pass over funds received from borrowers should not happen. My simple statement is that this is investor money and such a situation where the LO holds on to it should never be allowed to happen. Why is Mintos allowing this to happen I cannot say, but Income has been built from the start to also address and prevent this specific issue. We´ve done a lot of work on both our legal agreements and IT system to ensure better protection for the investors. Our security structures and agreements are built so that we can react fast to LO defaults if needed, e.g. in a situation where the LO does not forward the funds. We have the legal right and all the necessary information needed to take over the book in such a situation, and we are co-operating with local collection companies as backup service providers.
So the process could look like this:
1) LO fails to honour its obligations
2) We inform the LO and the back-up service provider of the default
3) Borrowers are notified to start paying to Income SPV account.
4) We start collecting funds and do periodical repayments to investors until all claims (principal and full interest) are settled
5) Only once the investors have been fully paid can the rest of the funds be transferred to the LO.
This is a fairly standard process and waterfall structure that institutional investors use when investing direct into loan companies. As mentioned before, they rarely suffer losses due to proper structure and adequate cashflow buffer. I can confidently say that in the current P2P environment, there is no other marketplace that would have as strong investor protection mechanisms in place as we have on Income marketplace.
How did you calculate the size of the ‘Junior share’ for the first lenders on your platform? Some of them don’t have much lending history…
Junior Share is used to make sure that there is enough money in the Cashflow Buffer to pay back all investors in case there is a loan originator default. Remember, the loans are used as real security to the investment, so Junior Share and Cashflow Buffer are set based on the quality of the loan book, not on the profitability of the LO. Because, if we need to take the loan book over, then what matters is the cash generated by the loan book. Thus a very profitable loan book with less market risks requires only a small Junior Share. Its a bit like LTV in real estate.
So lets say a loan book needs to generate 104% to service all investor claims when we take the book over (€1m book, would need to generate €1.04m of cash). The book in question is very profitable due to pricing and low defaults and is expected to generate 112% (so the €1m book actually generates €1.12m of cash if there are no other risks materialising) there is a surplus of 8% and as such a Junior Share would not be needed.
However, taking over the book may cause problems with payment behaviour. In addition there may be impacts from FX movements and other things. We calculate all the risk adjustments to require a junior share of 34% and the investable amount is at 66%. This means that taking all the risks into account, for the investors to be covered to 104% (to service all claims) there has to be a Junior Share of 34% to make this happen IF all other risks materialise (Generic, FX, COVID) to the max. In case they do not or only partly materialise the investors are over collateralised. So, in short, the Junior Share and Cashflow Buffer are our means of making sure that if there is an LO default the investors will be fully covered.
Final thoughts
The goal of Income Marketplace is to improve the security of the funds of retail investors by replicating the techniques used by large professional investors. The structuring of the relationship between P2P investors and lenders is something we would like to see many P2P platforms improve. That’s because some (particularly Mintos) appear to have lacked the legal or practical ability to take fast and strong actions when some lenders have failed to comply with their legal commitments.
There are two main downsides to mention for investors considering Income Marketplace. Firstly, they are currently a new site, so are still fairly small and with only a limited track record. We think that the quality of the management team, and the plans to raise further equity, mitigates this risk somewhat.
The other consideration is the loan originators that offer loans on Income Marketplace. At the moment they are also quite small, and two are located in the emerging markets of Brazil and Indonesia. The Income Marketplace has focused on protecting the funds of investors if these loan originators have any issues or fall into insolvency, but there is still clearly a risk.
So there are of course some risks, but investors also have the chance to earn returns of up to 12%. Each investor will have their own views on whether this risk profile is attractive. However we hope that the focus Income Marketplace has on improving structure and security can win the attention of enough investors for the site to do well. We expect that many investors will be willing to test out the site over the following months to see how it performs, and go from there.
This is total bullshit. The described scheme doesn’t add meaningful safety/security, and misleads in saying it copies the techniques of professional investors like Fortress. It just copies some keywords from those techniques.
Mintos has identical process to the described 5 steps. They faced exactly that situation and even described in one of the blog posts. What happened was: step 1- check, step 2 – check, step 3 – check, then LO tells borrowers they have legal contract only with LO and Mintos can go F*itself, as a result step 4 – zero money comes into Mintos accounts, borrowers keep paying according to their contract to LO or not pay at all, as a result step 5 – keep dreaming 🙂
And about Fortress and other pros – the real technique is to set up bank account controlled by Fortress, put it in all borrower contracts as the account for repayments from day one, and the Fortress then forwards to LO the funds in amount and proportion attributable to LO. During most of the time it is full amount minus Fortress interest (and amortizing principal, if it is not bullet), but when things become shaky, Fortress decides if to forward anything to LO, not the other way.
Hi Kriss, thanks for comments. You are right that Fortress and other lenders usually have a dedicated SPV and direct payments to its bank account. Usually in Europe these SPV’s are in Luxembourg due to favourable legislation. In many cases, forwarding the cashflow from LO accounts also happens.
As we are dealing with global assets and varying regulatory environments direct payments and Lux structures are not feasible. This is why we try to replicate these as close to possible in each market, but obviously they cannot be identical. The same logic of monitoring cashflows / controlling cashflows and distributing them through a waterfall still remains.
I hope the above clarifies if the above answers were unclear and will take this feedback to improve communication going forward. Happy for you to connect with me eg through linkedin to discuss further if you wish.
Kimmo – Founder & CEO Income marketplace
I wouldn’t have used such rude wording, but I sadly agree overall.
Let’s look at the two common cases for recoveries:
1. The LO is vaguely honest/cooperative/has a reputation. Then even the debatably competent Mintos recovery service will get the money back. E.g. Akulaku, IuteCredit Kosovo.
2. The LO is fraudulent and/or vanished and then you won’t get anything back. The debt will be invalidated by local authorities as Shark Lending. See Cashwagon VN.
The benefit of Income process “Cashflow Buffer” will save a few bucks in transit the day the LO would collapse.
The “Junior Share” is a gentle wish, but when the LO is brain dead whatever how Senior you are, you’ll still get nothing.
>>to take over the book in such a situation
In a regulated market, it would save some loans, such as https://www.mintos.com/en/loan/34037472-01 paid by borrower but never transferred back to Mintos. Sadly the Loan market is free-4-all, courts cases are blocked for years and the money siphoned meanwhile.
Maybe I’m too pessimistic, but I see those welcome improvements offered toward Quality as the “Buyback Guarantee” concept of 2021. Something that looks good on paper, but would fail in real life situation.
You cited real estate as an example, so couldn’t you escrow some shares (real stocks, not Loan shares) or senior bonds from the LO as an enforceable regulated guarantee? Because Senior share on the loan is, again, Senior Zero if anything gets wrong.
Hi JMN,
Its understandable that investors are sceptical about new platforms and especially new ways of protecting investors. As a P2P investor myself, I also find myself having a healthy dose of pessimism these days towards the messages the platforms send. In the case of Income marketplace I think we´ve really managed to build something great to protect the investors, but it of course takes time to win trust and to communicate this effectively to the investors.
In both of the cases for recoveries the loan book which we have taken as security does not disappear anywhere. Even if the LO goes bankrupt suddenly, our investors are the beneficiaries of the junior share and the senior part (the part that they invested in) and these funds can be collected to the benefit of them.
We have the full loan tape, investor data, and legal agreements under which we can take it over and start collecting to the benefit of our investors. I cited real estate as it is probably the easiest for investors to understand. A house that has a cash value of X is just as valid as a collateral as a loan portfolio, both can be taken over exactly the same way in case the borrower (in this case LO) does not meet its obligations. The main question is, what is the cash value of the collateral and this is something we establish in DD for the loan originator and adjust the Junior Share to be such that the investors would always be 1:1 covered if the LO defaults.
As always, I´m happy to connect on linkedin and discuss these in more detail.
Kimmo – Founder & CEO Income marketplace
Great anwsers, Kimmo!
I think you need to communicate more agressivle on how you protect investors money in case of LO banckrupcy. This is a very hot topoc for investors because of mintos and other cases.
Good luck!
@Kimmo: thanks for the answer
@NG: good point, it would probably be profitable in term of Communication/presentation to exhibit some recovery scenarios inspired from the real cases.
For example, would Mintos be Income, how would the Cashwagon case be handled? (zombie company raided by local police).
Or Capital Service? (healthy but dishonest company refusing to pay and buying time with fancy schedules).
My suspicion is not about Income, but the LO who could use any way to keep the money, even claiming your Senior Share is non-existent, à-la Grupper, or whatever. While they were some good outcomes like Akulaku or Aforti recently, yes, I’m still hard-hearted about the concept of enforcing rules in a rule less environment like P2P. Some tried in the crypto world (SAFU, Audits…) and failed hard.
History: A few years ago, the now defunct Finsquare tried to add security over their SME P2P portfolio with a Default Insurance. When 30+ of those SME defaulted, the insurance paid exactly zero back, using one exclusion clause or another for each case. Finsquare were honest and confident, just insuring (actually!) a loan for less than the loan yield doesn’t look possible.
At least I congratulate you to have used a real, P2P-specific idea to secure your portfolio at the root (close to the borrower) rather than the naive Finsquare approach to insure at the very end. I keep a look at your business and whish you good luck. It’s a paradox, but we’d need a default to actually enjoy your Senior Share recoveries 🙂
How do you notify the borrowers? There must be thousands of them. And what happens if the LO makes a counter-notification and misleads borrowers to pay to them instead of you.
Hi,
We have all the information of the borrowers on escrow that is needed to connect with them and to take over the portfolio. Should we need to take it over, our backup servicer a local collection company will inform them and start collecting the payments.
A counter notification is a valid risk, just the same as it would be for any institutional investor with a cashflow forwarding structure. Also in the case of direct payments to SPV a hostile LO could request borrowers to pay somewhere else.
These actions could probably expose the management to liability and lawsuits, so I think the risk is remote, but surely this is possible.
What we can say confidently is that we’ve significantly already improved investor protection in P2P and will continue working on it.
Kimmo – Founder & CEO Income marketplace