First-generation P2P platforms:
In the early 2000s somebody had an idea to build an online platform directly connecting people who wish to borrow money with people who wish to lend money. Banks were complicated, costly and slow to get loans from, so why the idea was to bypass them altogether and just connect the borrowers and lenders directly online.
The problem of this first generation peer to peer was the un-calculated risk that investors were taking with this form of lending. Even if they diversified and lent out money to hundreds of borrowers, the unavoidable bad debt would eat heavily into yields and cause losses. These losses and investor inability to analyze borrowers properly proved to be the bottlenecks for growth and a new solution was needed.
Second-generation P2P platforms – Marketplaces:
In the 2010s several people started realizing the problem of first generation P2P platforms and wanted to fix it. They came up with a Loan Originator oriented business model. In this model companies issuing loans (Loan Originators) as their core business would be connected to investors via marketplaces where investors could invest into loans while the loan originator took care of the relationship with the end borrower. This marketplace lending model proved to be much more scalable than the original peer to peer platform model and loan originators quickly set up their own marketplaces funding their loans and operation through them.
The marketplace model was a great improvement to the previous as it introduced a “buy back guarantee”, an obligation for the loan originator to buy back delinquent loans from the investors and thus removing the need for investors to worry about bad debt. Or so it was thought.
The marketplace model allowed loan originators too much leeway, leading to some of them buying loans from investors prematurely, slowing down payouts through pending payments and ultimately manipulating cash flows while not being fully transparent to investors. This was a natural development as the marketplaces were owned by loan originators and used to fund their own business. When trouble would come the shareholders of overlapping businesses would need to choose between the interest of their highly profitable lending operations and the interests of their marketplace investors. Its easy to guess what happened in many cases.
The marketplace model imploded in the 2020 crisis, which put all loan originators under a lens. Investors were not happy, as they saw some of the tricks loan originators were using at their expense, while not being transparent and outright with any real losses. Again, there was a need to improve the business model.
Third Generation P2P Platforms:
Income marketplace went into development in early June 2020 with one key vision; investors need to be protected better in Peer to Peer. The EU crowdfunding regulation published in October 2020 also follows the same key principle and tries to address among other things, risks brought to funded projects by related parties and consequently conflicting interests.
We have built new security functions and are aiming to create a marketplace where investors and loan originators both can thrive. We believe the stability and added security is in the benefit of both as it allows for cheaper funding cost to loan originators and a long term stable investment for investors.
The buyback guarantee remains with the same functionality. In addition we are introducing a novel security function that protects investor repayments in the case of LO default. The so called “cash flow buffer” is a form of collateral that kicks in if for any reason the LO cannot e.g. honor its buyback guarantee.
Income Marketplace is the first 3rd generation P2P platform, prioritising safety & transparency even if it means slightly lower interest rates for the investor. Ultimately, it is the risk/return ratio that matters, and this is what Income Marketplace has substantially improved for P2P investors.
We believe that our approach will become industry standard in the years to come.
