The Effects of the Global Financial Crisis on the P2P Market
The emergence of the COVID-19 virus has caused a global financial crisis that has had a severe impact on stock markets around the world. The Peer to Peer (P2P) sector has also not been immune from the fallout, the most significant of which is a desire from both investors and platforms for liquidity.
Many investors are nervous and looking to reduce their exposure to risk by selling their loans on secondary markets as quickly as possible, often at a discount. On the other hand, there are also those investors who see the crisis as an opportunity, so reactions are not completely uniform. In general, we feel that investors can be divided into three groups:
1) Those switching to the stock market
Some investors withdraw their money from P2P platforms because they want to transfer their fixed assets to the stock market in order to take advantage of the low prices of stocks. They are betting that the market will correct itself after the crisis and that they will see huge gains on their investments
2) Those losing faith in P2P
Some investors simply withdraw money because they believe the risk with P2P loans is too high in the current situation, and that the sector will see a huge rise in defaults and a resultant drop in returns.
3) Those who see an opportunity
Other investors continue to actively invest in P2P and are happy about the sharp rise in interest rates. They feel that, where platforms are reliable and secure, P2P still offers the safest investment during the global crisis. In addition, they may be buying loans on secondary markets at significant discounts and stand to make healthy profits.
What we are seeing across the board, however, is a tendency to wait and see, with only a small amount of new investors entering the market.
Platforms have reacted to the market conditions by increasing interest rates, both in acknowledgement of the increased risk of default by borrowers and as a means to match the attractiveness of the stock market.
There is a belief that the risk is increasing because borrowers may not be able to pay in case of a possible economic crisis and therefore the default rate will increase. But is this strategy chosen by the P2P market valid? Is there evidence to support these assumptions?
While we feel there is a solid basis for this hypothesis, the expectation is that it will only become an issue in the medium term and that investors and platforms alike are ignoring two other, far more significant, short-term risks.
Many platforms provide loans in «weak currencies», but operate their platforms in euros, which is also what their investors use to fund the loans. For example, a borrower pays in rubles, and the lender has to pay the investor in euros. Anyone who has been monitoring the rouble to euro exchange rate or Kazakhstani tenge to the euro exchange rate in recent weeks will have noticed that the so-called weaker currencies are performing very poorly in the current climate. If the P2P platform has not hedged currency risks and the loans become severely devalued as a consequence, creditors will bear the consequences. At Nibble, we have always felt that it is vital to prepare for any eventuality, and as a result, we have ensured that currency risks are fully hedged.
Many P2P platforms rely on permanent refinancing because they operate using only borrowed funds. The primary market volume of many sites has collapsed because it is much more profitable for investors to buy on the secondary market at a discount than to invest in the primary market. This leads to platforms being unable to serve investor withdrawals, or at the very least long delays for investors who request the withdrawal of their funds.
We cannot stress enough the importance of maintaining a truly diversified portfolio, by major asset classes and regions, which remains the best protection against market volatility.
As investors, it is highly important to assess the safety, profitability and estimated success of any operation before you commit your money to it. In times of crisis such as the present one, always keep in mind the key indicators for evaluating investments in a loan company: the quality of their products, their management skills and their historic financial performance.
How we react to the crisis and the measures we have taken
At Nibble, we have chosen to take a proactive approach and move quickly to protect our investors against the changes and risks brought on by the current economic situation.
In doing so, we have undertaken a variety of actions. Because we have our own scoring model, we can easily adapt it to any market turbulence. As such, we have changed the acceptable risk configuration for loans identified with a C rating. From now on, we will pass up the part of loans with C rating, leaving only the less risky part of loans. This increases investor safety and will help us to maintain a low default rate.
We also moved quickly to mitigate any operational risk. We have reviewed and reduced our operating costs as much as possible. Furthermore, in order to ensure the safety of our employees and safeguard against any possible disruption in our service, we have introduced remote work from home in both our Barcelona and Moscow offices. The Novosibirsk office continues operating as before as there is no significant outbreak of COVID-19 in that city.
Our priority is to protect investors from risks and be a sustainable group of companies. Therefore, our primary focus is on ensuring the safety of our investors and we do so by not exposing them to risk.
While we advise caution when investing during these turbulent times, we also feel very strongly that investors who are responsible and use a secure and reliable platform like Nibble will emerge from the crisis with strong and profitable portfolios.
As banks and traditional financial institutions usually react to any global crisis by reducing their appetite for risk and taking an extremely cautious approach to loans and lending, we expect the P2P market to grow exponentially once the initial crisis is over, so cautious and patient investors stand to reap significant rewards.
Take care of yourself and your family in these dangerous times.
Our team is ready to answer all your questions and assist you at all times. You can contact us by email at firstname.lastname@example.org or by phone at +3726991410. Also, for your convenience, there is a live chat function on our website. We continue to work with our clients — only remotely — and our support in the chat is open 24/5.
Despite our staff working remotely, our P2P platform operates as normal, and we deliver the same quality service as before. All planned business operations will be performed via daily videoconferences. We are well prepared to help our investors and focus on investing in our product and service.