Since peer-to-peer financing launched about a decade ago, the sector has grown exponentially. But is it here to stay? Yesterday the “Financieel Dagblad” asked Briqwise founder Pieter Porte his opinion.
“Definitely! Peer-to-peer financing creates opportunities for investors who are looking to make a better return on their savings and for business people looking for a commercial loan without using a bank. So it’s creating healthy competition with traditional lenders – in fact it’s turning the industry upside down.”
This article outlines the rapid rise of peer-to-peer financing and crowdfunding, and the recent interventions that governments have taken to protect investors. At the end of the article, Briqwise partner Frank van Dongen explains how property financing via Briqwise differs greatly from other risky peer-to-peer offerings.
What is Peer-to-Peer borrowing?
Peer-to-peer borrowing is a form of crowdfunding that arose from the financial crisis, when money was locked away and banks under attack. Also known as ‘P2P’ or ‘peer-to-peer lending’ Wikipedia describes it as ‘A way in which borrowers and lenders can execute a money transaction without the intervention of traditional financial institutions, such as banks. Both borrowers and lenders are individuals.’ To put it more simply, individuals lend money to other private individuals, or business people, without the involvement of a bank.
You can also see it as a movement of people rebelling against the all-powerful, dominant, traditional banks.
Success stories and misses
There have been many success stories but also some misses, especially in the early days of peer-to-peer lending. For instance, private investors in Great Britain lost tens of millions of pounds resulting in the regulators intervening (see below). But the success stories meant that established parties quickly jumped onboard and as a result, an increasing proportion (75- 95%) of peer-to-peer initiatives have gradually become institution-to-peer.
Peer-to-peer, or institution-to-peer, organizations are market places that use technology to arrange financial matches or deals. Many of these online platforms have attracted criticism for not exercising enough control or attention to detail. Another criticism is that peer to peer platforms do not estimate risks properly and all that matters is the money rolling in. Other negative observations include small margins, partly due to the high marketing costs that the platforms have to incur. In addition, around 90% of credit applications on some peer-to-peer loan platforms will remain unapproved – and that is also a substantial expense.
So historically, private investors have potentially been seduced by attractive promised returns, but without fully understanding the potential risks involved.
More Protection for Investors
In 2017, the Dutch Authority for the Financial Markets (AFM) introduced strong new measures to better protect private individuals. The Dutch Bank has also been on the case. Please read the AFM and DNB positions on peer-to-peer lending in this joint document.
New European regulations are about to be introduced too. The regulations are framed around four key points:
- longer reflection time
- better information
- better transparency and
- more trade freedom for platforms
Opportunities, but also risks
Member of the European Parliament, Caroline Nagtegaal, explains that the new legislation serves two interests:
- better protection against risks and
- the possibility of maintaining and even stimulating, this alternative form of financing as it offers great opportunities for startups and scale-ups
Experts expect the number of platforms in the Netherlands will shrink in the coming years – certainly when the economy slows and new loans decrease and defaulters increase. Platforms will need to deal with this, most likely taking more risk that will end up on the financier’s plate.
The Briqwise Peer-to-Peer model
Briqwise is an online platform that provides peer-to-peer financing. Frank van Dongen, Briqwise Partner, explains their approach and philosophy:
“The Briqwise approach is fundamentally different in that our priority is certainty for investors. Maybe it’s my background as a banker, but I am amazed when I hear how easily a substantial loan can be funded on the basis of an application that is short on detail. It’s obvious when the necessary questions haven’t been asked or the due diligence performed. Where is the risk management on behalf of the investor? Duty of care – that is the Briqwise difference.”
Peer-to-peer with a difference – due diligence
“Briqwise isn’t a crowdfunding platform where groups of investors lend small amounts of money to a single borrower. Our investors lend larger amounts – usually on a one-to-one basis – to selected borrowers. And they are always covered by first mortgage security.
At Briqwise, an investor is not dependent on the business success of the borrower. The value and stability of the property is their security. That value is carefully tested and assessed by an accredited API valuer. The first mortgage security, the low Loan-to-Value ratio and the guarantee of monthly payments by Briqwise provide extra securities. You won’t find that level of security and comfort in crowdfunding or the more opportunistic peer-to-peer transactions referred to at the beginning of this article.”
Frank concludes with a final, but very important fact, “It’s in Briqwise interest to minimise risk, because we guarantee payments to our investors. So financing with a high risk profile is a no go for us. We carefully vet every borrower who applies via Briqwise. It’s in their best interest, the investors best interest and keeps our business plan strong.”