The current economic crisis, caused by the global spread of the COVID-19 virus, is almost unprecedented in scale, but it may also offer many great opportunities for savvy investors.
LearnBonds spoke with Marina Smirnykh, chief executive of Nibble – part of IT Smart Finance, about the implications for the peer-to-peer (P2P) market: “There will be some big changes in the peer-to-peer market over the coming months, but I expect the industry to emerge from the crisis in a more stable and mature position than before.”
Smirnykh believes that the closure of Estonia-based peer to peer lending platforms such Kuetzal, Envestio, and Latvian-based Grupeer may dent investor confidence in the short-term, but should end up being good for the industry as a whole in the long run.
“The demise of these platforms will push remaining platforms to improve as they work to regain investor confidence. Those who survive the crisis will have proven the viability of their business models and this in itself will go a long way to regaining investor confidence,” she says.
She also has some advice for investors to keep in mind over the coming months.
1) Be patient: Before you rush to sell all your P2P investments on secondary markets at a discount, keep in mind that governments around the world are already drawing up plans to bail out small business owners, who form the largest part of the P2P borrower pool. Yes, there may be delays in paying back loans, but default rates are not expected to increase massively, so the loss you’re taking now by panic selling may look even worse later.
2) Don’t be greedy: In the initial weeks of the crisis, as the stock market crashed, many P2P platforms saw mass withdrawals by investors. There were a few reasons behind this beyond just fear. Many felt that, with stock markets at historical lows, this was a good time to switch to investing their money in stocks. While it is true that many of them stand to make good profits, there may not be a big enough appetite globally to bail out major corporations in the wake of this crisis, and some stocks may never recover.
Smirnykh adds: “You should also be aware of investing only in P2P platforms that have suddenly raised their interest rates. It may seem attractive at first, but in the long run, this may cause a severe increase in defaults. Providers such as Nibble have chosen to keep their interest rates stable, which shows a moderated long-term approach.”
Why P2P remains a good choice
One of the first pieces of advice you should consider when it comes to investing, especially in times of crisis, is to make sure you diversify your portfolio. The main reason is that, as a general rule, the more diverse an investment portfolio is, the less risk it is exposed to. P2P investing represents an easy way to invest in multiple places, using relatively small amounts per investment. Look to diversify across both sectors and geographies. Having a variety of investments reduces investment risks, while diversification is also an important component of reaching better financial returns.
The market will grow
Once quarantine and lockdown orders across the world are lifted in the coming months, there is expected to be a surge in consumer spending and borrowing. Small businesses and individuals across the world are likely to need short-term loans to get back on their feet, and P2P will be perfectly positioned to serve this need. There are already significant plans for governments to leverage P2P platforms to distribute funds to mitigate the effects of the crisis.
The current crisis is doing a great job of bringing to light those platforms with shady business practices or broken operating models. Forcing responsible platforms to be more transparent than ever, which is great for investors. Choose a platform that strictly self-regulates until the European Union introduces legal procedures for the P2P market. This type of self-regulation and commitment to best practice may come in the form of a Central Bank Licence and registration with a Self-Regulatory Organization MIR Certificate.
In regards to lowering risk, Smirnykh comments: “At Nibble one of the first steps taken during this crisis was to tighten up risk procedures, which were already very robust. While investing carries risk by its very nature, our main goal is always to protect investor funds. We expect the industry as a whole to follow this move, which will ultimately be a huge benefit to investors.”
When you hand over your money to a bank or investment fund, you essentially surrender control of where that money will be invested. The transparency and control offered by P2P platforms allow you to choose the exact projects that appeal to you. This is especially important in times of crisis.