Debunking myths on how COVID affected P2P investing

In the years preceding the global financial crisis of 2008, observers viewed P2P lending and investing as a fintech alternative to challenge traditional bank lending.

By connecting borrowers and investors via the web-based platforms, the third-party costs could be eradicated, offering higher returns for investors and lower borrowing rates for borrowers.

And it worked. With falling saver interest rates, yield-hungry investors flocked to P2P platforms.

Between 2015 to 2018, the UK’s total alternative finance share was 60%, the largest in Europe, followed by the Netherlands and Germany. Per capita funding was highest in the UK, followed by Latvia and Estonia.

Unfortunately, like most industries, the P2P lending sector faced severe disruption in the spring of 2020.

As national lockdowns swept the globe, investors rushed to withdraw their funds from P2P lending platforms.

The collapse in confidence in the P2P lending sector led to many platforms losing liquidity. In reply, some platforms froze withdrawals, leaving investors unable to access their cash when many needed it most.

Other platforms sought to protect themselves by introducing a temporary cut in interest rates or increasing loan-servicing fees.

For a sector that thrived during the 2008 credit crunch, it was sad to see the same concerns confronting investors regarding accessing their funds.

Rather than looking to remove their investments from what they assumed were safer mortgage-backed securities, this time around, it was P2P loans.

As we have heard time and time again here at Monestro, investors were sold on the promises of higher yields and safer risk to their capital.

Whenever an event occurs, investor panic reaches new heights. For example, in the UK after the 2016 Brexit vote, several UK property funds had to halt withdrawals.

Fast forward to 2020 and the COVID-19 pandemic; investors sought to withdraw their funds for fear of losing liquidity.

P2P investing post-COVID-19

When liquidity crises like during the pandemic occur, it causes alarm and panic amongst investors. However, it can also spell disaster for P2P lending companies. Some, mainly the most disreputable ones, had to close. Others had to modernise.

P2P platforms sought to re-evaluate their offering or those who never made outlandish claims in the first place became more resilient than ever. Additional yield-hungry investors began flocking to them and increased the company market share.

This does not mean the P2P sector had it easy. Rebuilding trust with investors is no easy feat.

Those few platforms that cut off investor withdrawals left a bad taste in the mouths of many investors searching for returns.

It’s a situation we recognised here at Monestro.

We permit withdrawals anytime when the balance is available. Yet, for investors to obtain their funds they can do it by selling it on the secondary market or when the loan has expired, been repaid, or the buyback obligation has been triggered.

This ensures that all our investors’ funds are safe together and are not lost due to untimely withdrawals.

Naturally, once the loans mature, there are no fees on withdrawals.

Furthermore, we made conscious decisions only to offer loan portfolios, where investors can diversify their loans. Plus, they receive additional guarantees in the form of a buyback obligation.

For burnt investors, though, even our promises of transparency are not enough. Too many P2P myths have sprung up and dented confidence in the alternative finance sector.

Debunking the myths on how has COVID affected P2P investing

P2P investing is shady finance

Many financial industry commentators argued that P2P has not only survived the pandemic but played a pivotal role in the economic recovery.

Platforms have helped borrowers affected by the crisis to provide much-needed finance or investment when most businesses and individuals are struggling.

For many business owners, P2P borrowing is their first interaction with a P2P platform. By providing much-needed support, P2P platforms hope businesses will become trustworthy and repeat borrowers for future investors to lend capital to.

P2P does not offer returns as high as stocks or shares

P2P lending platforms have continued to beat stock market returns. Even investing in lower-risk loans still offer better returns.

P2P, whilst offering similar rates of return compared to stocks and shares, definitely hold the lead over saving rates. Thus, alternative investing became more attractive in the market for yield-seeking investors.

P2P is a bubble

The Covid-19 induced recession presents the sector’s opportunity to prove its staying power and resilience.

So far, despite some platforms going bankrupt, it has proved resilient, much like investment banks.

Once it has demonstrated, it can thrive in an economic downturn; the more likely investors will accept that P2P is not a bubble.

P2P platforms don’t have enough liquidity

When investors want their money back from their stocks asset manager, they merely sell their stake in the fund to someone else.

Therefore, investment managers hold illiquid assets like unlisted shares or property without the risk of liquidating these holdings at inopportune moments because investors with their money back.

During the COVID-19 pandemic, P2P platforms went bust when investors began withdrawing their funds before their loans matured, affecting all investors.

Resilient P2P platforms like Zopa applied a 1% fee on untimely withdrawals (to discourage investors from making withdrawals before their loans mature). Or, they sold their loans on the secondary market, ensuring platform liquidity remained buoyant.

Monestro does the same; if you wish to sell your loans before they mature, we do so on the secondary market.

P2P platforms take all types of investors

P2P has unfairly been seen as a ‘get rich quick’ scheme. Investors deposit funds and then watch the interest rate returns grow their income or provide income until they cash out.

Despite the apparent gains of new customers, P2P platforms are well aware of such quick investing risks. Not only does it damage liquidity, but it also reduces the trust placed in the platform from borrowers and loan originators.

P2P investing is about the mid to long term. More rapid investment gains should seek crypto loans but beware of these types of loans’ high volatility.

The P2P sector is not transparent

The COVID lockdowns have been a disaster for small businesses across the world.

Those businesses that many assumed were trustworthy were not.

Trust is built on transparency. So P2P platforms have moved to provide better and audited data regarding their loan books. P2P companies have also set up more stringent criteria for assessing loan originators only to accept higher-quality loans to offer their investors.

Such criteria and transparency reduces uncertainty and thereby increases customer trust.

The P2P sector is old-fashioned like the banks

P2P lending platforms are fintechs, and they tend to have excellent technological systems.

Because of their technological advantage, P2P platforms are better adapted to working remotely and remain operational effectiveness, unlike banks, which require more face to face support.

During periods of unprecedented uncertainty, this is crucial for investors.

P2P investing and 2021

The global pandemic-induced crisis in the P2P sector will not be the last financial crisis.

However, history has taught us that the financial industry becomes more innovative, transparent, and resilient with each situation.

Thus, those P2P platforms that learned from 2020 will emerge more transparent and financially more robust as a result.

Thus, 2020 will be seen as a pivotal year for the P2P industry: one that removed the less reputable players, leaving more adaptive platforms to provide better investor opportunities in 2021 and beyond.

Originally published at https://monestro.com.