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.
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.
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.