The importance of transparency in P2P during the current crisis | Nibble blog

The importance of transparency in P2P during the current crisis

3 min to read

The emergence of the CoVid-19 virus and the resultant global economic crisis is being keenly felt across all financial sectors, and the Peer to Peer (P2P) industry is no exception.

The importance of transparency in P2P during the current crisis© dizanna / DEPOSITPHOTOS

With platforms going out of business and loan originators expected to start defaulting as the crisis deepens a few things are starting to emerge that may be good for the industry in the long term

If one visits message boards where investors share their opinions and experiences, one issue stands out above all others — the need for transparency from P2P platforms.

According to van Sharafiev, Business Development Director of IT SMart Finance: «We expect the crisis to educate investors on both the risks and opportunities of the Peer to Peer market and bring about a more discerning era where potential investors will become more risk-averse and expect more information from platforms.»

«Those businesses who are open to publishing their financial results, especially in an independently audited format will be more attractive to investors»

What can platforms do to achieve transparency?

Voluntary regulation

Industry leaders and investors are anxiously awaiting the introduction of EU-wide crowdfunding regulations, and in March 2018 the European Commission presented a proposal for a regulation on crowdfunding service providers as part of its Fintech action plan.

The proposed legislation will look solve the problem of crowdfunding platforms having to comply with different regulatory regimes based on national legislation, the Commission’s proposal suggests introducing an optional EU licensing regime, where platforms must deal with only one set of rules in both their home market and the other Member States without. The idea is that this will give platforms access to a larger pool of investors and allow them to scale across borders much faster than is currently possible.

But the process has been slow and in the meantime operators who wish to do business in multiple countries have to contend with an array of different rules and regulations, which not only hampers the growth of the industry but makes it difficult for potential investors to gain clarity about which rules a platform is subject to.

While the industry waits for the legislation investors can make sure that their choice of platform adheres to rules like Anti-Money Laundering (AML) and that they have a Credit Provider License (CPL). There are also a variety of industry bodies that, while voluntary, help to enforce standards of best-practise.

Financial transparency

As a general rule, if you have trouble determining who owns and operates a company by looking at their website, you should take it as a warning sign. In addition, it is vital to check whether a platform publishes its annual or quarterly financial results and whether these are independently audited. Tracking growth, seeing financial trends and being able to clearly see how a company is investing its income can give an investor a very good idea whether it is a responsibly run business with long-term plans or a quick cash-in. For an example of this financial openness, you can look at Nibble’s documents page, where you will find licenses, audited reports, annexes and more.

Platform transparency

When you choose to invest your money on a P2P platform, are you sure that you know exactly who you are lending money to? This may seem like a stupid question, but with the proliferation of loan originators across many countries and continents, it isn’t always that easy to tell, especially if you are using an auto-invest feature. With the collapse of some platforms in the recent past, it has even emerged that some loan originators did not even exist, and were created by platform owners. While there are some good originators and responsible platforms, it may be a safer option to invest in one where the platform has its own holding structure, which means that it also owns and operates the consumer-facing lending business that is being funded by investors.

Conclusion

As the P2P market matures and the fallout from the current global health crisis becomes clearer, lending platforms that put a high value on transparency and openness will be the ones who survive and come out on the other side stronger and ready to deal with the new financial world. The expectation is that P2P and crowdlending will play a vital role in the economic recovery of small and medium businesses in particular, as well as provide individuals with a lifeline to get back on their feet financially. For investors who choose wisely during this time of crisis and ensure that they only entrust their funds to transparent, well0run platforms, the rewards will be substantial.