Panic in the Baltics

January has been an interesting month for the Baltics p2p lending platforms. And not in a good way. A feature that attracted investors in the first place, an early buyback with a fee, proves to be an Achille’s heel for a series of crowdlending platforms.

January has been an interesting month for the Baltics p2p lending platforms. And not in a good way. A feature that attracted investors in the first place, an early buyback with a fee, proves to be an Achille’s heel for a series of crowdlending platforms.

I stayed on the side for a while, but this is becoming too interesting now to not say anything about it.

A play in 4 acts. Act 1 – Kuetzal

What started in December as genuine concern about some of the loans Kuetzal offered, soon evolved in a big boulder of panic that proved to be the end (for now) of Kuetzal. Before Kuetzal managed to soothe their investors, their bank accounts got frozen due to AML complaints. One month later, Kuetzal abandoned the fight with a final message:

“Unfortunately, we have to inform that Kuetzal is announcing wind-down, furthermore the company will only process withdrawals of the funds, the company is no longer accepting new project applications, investors registrations and deposits. Company’s reputation was harmed sufficiently for the past weeks, and Kuetzal management does not see a way to recover investor’s activity, therefore we may not return to usual working process. The mission of the company may not be reached anymore.”

With this message, it seems they either took a long vacation to regroup or just willfully ignored all investors messages and stopped responding. For what is worth, their website is still up and running. They still say they plan to honour withdrawals, once (if) their accounts get unfrozen.

Act 2 – Envestio

Investors are not rational when they panic. Since Envestio was already under scrutiny regarding their last year’s change of management and ownership, it seemed like a good reason to withdraw early from the platform as soon as everyone could.

The early buyback promise would work under normal market conditions, but in no way can it handle mass-withdrawals. If any platform had that money ready, it wouldn’t need to ask investors for their funds.

Add to the initial panic a growing trend of increasing concerns on Facebook investor groups, put in some half-done investigations like this one (already deleted from the original site, but Google keeps track of changes) and then panic spreads even more.

While Envestio might be a good platform to invest in, its team sucks at public relations. Its attempts to reason with investors concerns were poorly constructed, and sometimes even degenerated on personal attacks (on Twitter).

On the good side, they acknowledged they have a problem in an email to their investors:

 “The end of 2019 on Baltic crowdfunding market has been quite challenging for all players, as failure of Kuetzal platform caused a crisis of trust and provoked many investors to withdraw their funds from the market.

Envestio also faced a number of pre-mature investment buybacks and subsequent withdrawal of funds, which were accomplished without any delay and in full amount thanks to Envestio’s reserve fund, which in present circumstances varies from EUR 500 000 up to EUR 800 000.”

Their email goes a bit more, with the (optimist) conclusion that investors shouldn’t draw any parallels between Envestio and Kuetzal. As if panic is something to be reasoned with.

5 days later, on January 21st, Envestio seems to have taken a timeout. On their last blog post (offline as of now) they complained about DDOS attacks and that they’re the victims of a

“well-planned set of actions aimed to cause significant financial and reputational damage, as a result of which the Envestio platform should inevitably begin to experience substantial difficulties with current payments to its investors”

Then they went fully silent. Fully unprofessional. The website down. Blog down. Not even a simple maintenance page saying “we’re working on our problem”. No email or social media communications. Fueling the questions: “is Envestio a scam” or “is this a typical early-exit scam”?

Act 3 – Monethera

Monethera also thought it a good idea to offer early buyback to investors in case they wanted to withdraw their funds before their investments mature. And for the first 6 months, it worked well. 2500 people invested 5 million EUR on their platform.

But the same early buyback seems to affect them too:

 “In relation to the well-known events on the market, our company is temporarily forced to limit the option of the repurchase of your investments from our reserve fund. This is because our company has obligations to our partners, both borrowers and investors. We care about our reputation and have always complied with all our commitments. The restrictions shall come into force on the 21st of January 2020, valid for 30 calendar days, or until market situation will become more clear and stable.”

At least Monethera seems a bit more anchored in reality. It reacted swiftly and announced in a decent tone that they suspend for 30 days the buybacks until the situation stabilizes. Good move on their part. Business stability is important.

Act 4 – Wisefund

Wisefund reacted the same day as Monethera to the Baltics panic, although in a less well-mannered way:

“Unfortunately, due to the panic lenders forget that they entered into contractual relationship issuing a loan for certain period of time, and contractual relationships should be honored, whereas the early exit option is actually meant for people who are ready to bear the early exit fee because they really need that money, instead of just running away from obligations they entered. Simple example, how would you feel if for no reason your local bank would request an immediate return of your mortgage?”

Even if they’re right, they shouldn’t talk this way with their investors. It will just fuel the panic even more.

The panic recipe in 6 simple steps

Start with genuine concern on some of the loans Kuetzal offered. Ask inconvenient questions and then receive half-answers.

Let it sit for a while on Facebook groups. People start doubting their previous investing decisions.

Add a few rehashes of the initial investigation and pronounce the word “scam”. Is Kuetzal a scam? Panic starts.

Then add some comments from anonymous people with no proven credentials on how almost every Baltics crowdlending platform is a scam. Wait a bit more. Then ask innocently “is Envestio a scam”? People start asking Envestio if they’re a scam or not. People start withdrawing money, triggering buybacks.

Then ask “who’s next”? Monethera? Wisefund? They all seem the same. You don’t know anything about them. And they all offer an early exit with a buyback guarantee, minus a 5-10% fee. That fee is gladly paid. Why risk losing all the money when you can be safe. It doesn’t matter that nothing changed in the last 3-6 months ago when you started investing here. Cut your losses early and exit while you still can.

Then all hell breaks loose.  The great burning of witches begins. It’s time to clean up the weak platforms and let only the strongest survive.

Can I learn something from this?

It’s not ideal to learn lessons with your investment money, but there are a few lessons I can draw from the recent events.

Early buyback is a sword that cuts both ways

What attracted investors in the first place seems to be the thing platforms struggle with the most. The early buyback was intended for normal market conditions, not for full panic mode. Building a secondary market on your platform, even though it needs more IT resources, is preferable to offering early buyback. In case of mass panic, the investors are still stuck, but at least the platform’s financial stability is not affected.

Team experience matters

I knew Kuetzal’s team is inexperienced. A bunch of kids fresh out of school riding the crowdlending wave trend. And they were the first victims of panic. I had put more hope in Envestio, although the recent events don’t portray them in a flattering light.

The platform’s team experience matters, both in communicating with investors, and both in handling risks – from due diligence to market panic. Monethera and Wisefund seem a bit more down to earth when it comes to crises, and I’m content with how they reacted to the recent events.

Think for yourself before investing

The buyback guarantee looks great, but it’s limited. The Baltics platforms are not the only ones offering loans with 20% interest rates. UK FCA accredited platforms do too. Except they pass the risk of default to their investors and don’t offer any buybacks.

So, loan defaults are expected. If you’re not prepared for the default risks, don’t take them. If you think that p2p platform can’t handle those defaults, stay away from it.

The European crowdlending market desperately needs regulations

The regulations discussions around crowdfunding have been going nowhere for the past 5 years. It’s about time they do.

It wouldn’t mean platforms won’t default. Just look at the UK (for example, Lendy). But it would bring investors more confidence. Losing money due to management incompetence is much preferable to losing money by being a victim of a scam.

Small footprint platforms – how safe are they

Does it matter if a platform has a team of 4 people or 40? It does.  

I can build a basic p2p platform in about a week. Similar to what Kuetzal has, maybe even a bit better. A landing page, user management, manual AML and KYC processes, loan listing and loan details pages, a user dashboard and a page for withdrawing funds and details of a bank account where you can deposit funds and I’m done. Maybe add a few failsafe checks so I’m sure user interactions are recorded correctly. Maybe add a blog section where I publish generic finance posts bought with 10 EUR from iWriter, so I look like I know what I’m doing.

Then partner up with somebody that knows about finance and finance law. And somebody who knows a bit more about social media marketing. Then ask friends with companies if they need loans and publish them.

I’d probably need to register my company in Estonia, with my e-residency, because the capital requirements are almost zero and regulations are looser than in Romania.

Total capital invested: less than 5000 EUR. Monthly costs? A lot less than 1000 EUR, as the company wouldn’t have any employees and the associates would receive profit dividends.

Would my platform be successful? Probably. Would I be prepared for any crisis? Most likely not. I wouldn’t have the resources to stand any attack. A one-man army can’t fight an angry mob on Twitter and Facebook.

Can we bring down platforms if we try

Yes, we can. Just panic withdraw money out of them. Does this make them a “scam”? Not necessarily. It just makes them unprepared.

What to do if you’re panicked?

If you feel you’ve been wronged, or you have concerns, you can file a police complaint here. There are already a few complains made, also by the European Crowdfunding Network, which seems like a useless organization anyway, expelling members only after they run into problems and still trying to seem proactive.

Look at small claims procedures, although it’s a bit early for this.

Is my money lost? Not really. If the platforms go bankrupt, an administrator would take over their loan book and settle them. I would receive less than I invested, due to administration fees and based on the quality of the loans, but my money didn’t disappear just because platform owners decided to stop communicating.

To end with a bad joke, Fast Invest also offers early buyback, you just need to forfeit the interest earned on the loans bought back. Does anyone care to test how far that buyback goes?