How to Conduct Due Diligence of a P2P Platform
In the first three months of 2020 alone, it’s estimated that P2P investors will have lost more than €40M. The main reason for this loss? Fraudulent P2P platforms like Envestio and Kuetzal, as well as Monethera and Grupeer, which lured investors into their Ponzi schemes with high interests of up to 21% per annum.
These P2P lending scams had an incredibly large negative impact on the entire P2P lending space, causing investors to withdraw most of their P2P investments, even those on legitimate P2P platforms. At the end of the day, no one can blame them as, in today’s climate, the risk of losing a significant amount of money is very real.
So, What Can be Done to Increase the Safety of Your P2P Investments?
There is no tool that would eliminate all the risks, however, there are methods that can help you lower the potential risk. One of those methods is doing your own due diligence of the P2P lending platform.
We, at P2P Empire, complete our own due-diligence of all P2P platforms; you can read these in our individual P2P lending reviews. After reviewing more than 30 platforms, we’ve become pretty good at spotting red flags and potential fraudulent behaviour, and now we want to pass our knowledge on to you.
But, we of all people understand that investing is a time-consuming task, and every investor needs to be wise with how they use those hours. As a result, we have created a quick and simple guide to how you can complete an effective 10 minute due diligence.
Let’s get right to it, since time is money, right?
Due Diligence Checklist
Here is a quick checklist that you can use to get an idea as to whether the platform you’re considering investing on seems legitimate. For most of the points, you don’t even need to leave the platform’s website.
Due Diligence of a P2P Platform
- The platform’s website has a dedicated About Us page
- The CEO, founders and key management are introduced on the website
- The listed contact information includes address, email, phone number
- The address listed on the website matches the legal address in business directories
- The platform’s financial reports are listed on the website
- There is a dedicated statistics page on the website
- Loan originators are introduced on the website (and you have access to their financial reports)
- You can find information about the protection of your investment
- The platform’s terms and conditions (T&Cs), as well as a template of the loan or assignment agreement, are available before registering
- Any funds you invest on the platform will be stored in segregated bank account
- The T&Cs cannot be amended without prior notice
- The Platform’s representatives are active on social media
If you’ve read the above with confidence that you can go ahead and complete your own due diligence now, get going! If not, don’t worry; it takes practise and you’re in safe hands (trust us, we’ve done this many, many times before!).
Continue reading to learn more about what exactly you’re looking for, and, once you’ve found it, how to evaluate whether the information the platform is providing is sufficient.
About Us Page
When investing in P2P loans, you are giving away your money in the hope that the company won’t run away with it. The least the platform can do to bring you comfort that this won’t happen is to introduce itself and the key management who run the business.
Mintos has done a great job at this as they use their About Us page to introduce the company’s core values and shareholders. If you want to dig a little deeper, you can also visit the Mintos’s CEO’s LinkedIn profile, as well as those of other Mintos employees.
Tip: We highly encourage you to google the name of the CEO to get an idea of who is running the platform.
If you look at Lendermarket's About Us page, you will find out that the platform is collaborating with a big loan originator Creditstar. Lendermarket’s investors and potential investors are provided with no information about the platform’s shareholders or the team behind the company.
This is a good example of what a P2P lending platform’s About Us page should not look like. After all, you have to remember: they are dealing with investors’ money.
Every P2P lending platform should list the company’s contact information on their website, including their legal address and the address of their HQ. You should also google the company’s address if you can find it in one of the business registries.
EstateGuru is a good example of how a P2P platform’s contact information should be presented. EstateGuru lists their HQ’s address, alongside those of their other offices. You can also find phone numbers to the support team and links to social media. Investors can also use a chat bot to get in touch with EstateGuru.
In contrast, if you look at Ekassa’s “contact details”, you will find quite different information. Ekassa’s ‘address’ is popularly used by many virtual companies (in fact, this one made it onto Estonian Open Government Data Portal’s top 10 addresses for Estonian companies), no one replies to the provided email address and the facebook page has nothing more than a profile image. Additionally, you will find multiple links to pages that don’t provide any value.
Blog or FAQ Section
We of all people know that it’s important to keep investors up to date with relevant information that has an impact on their investments. As a result, it is every platform’s responsibility to have a dedicated blog section for sector or company-relevant news.
We particularly enjoy reading EvoEstate blog posts; they’re always full of value. Platforms such as Bondora, Reinvest24, EstateGuru and Mintos are also good resources to stay up to date with the latest news within the P2P lending industry.
When completing our due diligence, we found that some sites like Wisefund have attempted blogs, but unfortunately these do not provide the investor with any value at all.
We really hope that P2P investors do not need to read a “Guest post about peer-to-peer lending definition”.
Statistics are a very much underrated metric, and we could spend the entirety of an article writing about their relevance when performing due diligence. We will try to make it short for you; here are the main metrics we are looking at while reviewing P2P lending sites, we’ll explain why we’ve chosen these in another article:
- Platform’s age
- Investors’ earnings
- Total loan value
- Number of investors
- Default rates/bad debt
- Average portfolio size
- Financial report
Sharing relevant data with investors is evidence of transparency. If you hadn’t already gathered, we take stats seriously. Check out our individual P2P lending reviews for up-to-date statistics of each platform.
The award for the best dedicated statistics page (an exciting award, we know!) goes to Mintos, which is one of the very few platforms that provide all the statistical data from our list. What we should emphasize is that Mintos shows investors the amount of funded loans on a monthly basis, rather than providing a misleading cumulative amount.
Mintos also provides audited financial reports dating back to 2015.
You will find a really good example of very poor statistics on Robocash. All you’ll find in terms of stats on Robocash’s site is that the total loan volumes by December 2019 was €138,059,128 and that the platform has been operating since 2017.
Let’s be honest, that’s not enough.
Also, Robocash does not provide financial reports for their P2P lending marketplace.
We are currently in close communication with Robocash and we will soon add more statistical data to our Robocash review.
Loan originators are lending companies that get the funding for their loans from P2P lending marketplaces. You as an investor buy a claim against the borrower which is being serviced (managed) by the loan company.
Every platform that uses loan originators should provide at least basic information about them, as well as their financial reports.
Mintos is again one of the few platforms that provide this information about their loan originators, and this proficient platform also provides their loan originators’ financial reports, which are often even audited.
Some of the platforms do not even provide a list of all the loan originators; Fast Invest is amongst the least transparent platforms when it comes to loan originators. Currently there are only three publicly mentioned loan companies which we have listed in our Fast Invest review.
Simply put: a platform that cannot explain how it protects your investment isn’t worth your attention.
Unfortunately, the typical investor is much more interested in the high returns promised by many platforms than the security of your investments. This is also the reason why most platforms don’t bother explaining the protection your investments have.
EstateGuru is one of the few platforms that explain how their loans are secured and what risks investors should be aware of.
Most platforms hide the information about potential investment risks somewhere in their FAQ section, as is the case with Swaper and many other platforms.
Want to find out how you are protected and what happens to your investment should the platform go bust? Read the platform’s terms and conditions.
Terms and Conditions
Let’s be honest for a second: 99% of investors do not read the T&Cs. No one likes to read 20 pages of fine print which is hard to understand. If you are investing large sums, however, we highly recommend reading and understanding the T&Cs as if the platform ceases to operate (which is a very likely scenario), the clauses this document contains might affect your rights.
We have read through many P2P lending sites’ T&Cs and selected a few points which you should pay attention to and highlight as a potential concern should you see it in a platform’s T&Cs.
- Do the T&Cs refer to a price list, and is there a price list available on the website?
- Does the contract state whether your funds are stored in segregated bank accounts?
- Are the terms copied from other platforms’ terms?
- Can the platform amend the T&Cs without prior notice?
Tip: Use the search function CTRL + F on your PC and look for keywords such as “amend”, “notice”, “segregated”, “bank account” or “price list” to find the right sections.
Being able to amend the T&Cs at any time without prior notice does not provide any protection to the investor. We have seen some platforms amending the terms in their favor before ceasing their operations. Kuetzal was just one of them.
Here is an excerpt from TWINO’s terms and conditions:
Alongside being able to access and read the T&Cs, investors should also have access to a template of the loan or assignment agreements before signing up. Many platforms do not provide those agreements unless investors give them all their data or actually invest first. This is a potential red flag you should be keeping in mind when completing your due diligence.
Many investors spend a lot of time on social media, exchanging their experiences with the P2P lending community. You can easily spot whether a platform is engaging with investors or ignoring them. We suggest you look at a platform’s social media profile and the profile of the CEO, before you sign up.
What should you be looking for?:
- Does the company share valuable content and inform their investor base of any updates and changes on a regular basis?
- Does the CEO provide any value to the investors?
When looking at whether the CEOs provide any value, try and find webinars or speeches held by the CEO.
For a good example of how CEOs should engage with their investor base, watch Martins Sulte’s YouTube updates regarding the situation caused by the COVID-19.
In fact, many CEOs from the recently found fraudulent P2P lending platforms did not show their face to the public.
Evaluating the results of your due diligence might take slightly more than 10 minutes, however, we believe that it’s going to be well worth your time.
At the end of the day, you do not want to invest your money on a shady platform, do you?
Remember that P2P lending is still not regulated by the EU and there are more risk factors to consider.
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