This is a guest post by Pärtel Tomberg, CEO of Bondora.
This month we started the roll-out of Bondora Ratings, a loan application rating system based on the proprietary credit scoring model, with the aim to bring better predictability and consistency of the returns for investors active on Bondora platform.
Our initial aim for developing a credit scoring model was to bring the best banking practices to peer lending. Banks might have failed at providing people with affordable credits, but they have done a few things right, such as developing strong credit scoring models, that have helped them generate premium returns for their investors. With Bondora Ratings we are bringing credit scoring model to individual investors so they could maximize their returns in the same way banks do.
Being a platform that facilitates the exchange between lenders and borrowers, we believe it is our responsibility to bring the best practices, such as credit scoring, to peer lending; thus, making it an effective, efficient and mutually beneficial process for both parties. Eventually, Bondora Ratings will allow credible borrowers get a better rate for a loan, while investors will receive a predictable return level.
On top of bringing banking practices to peer lending, we saw a need for a simple, transparent and unified way to represent the risks and potential returns associated with a particular loan. Until recently, our investors used their own sophisticated models to evaluate the risks and plan their investments at Bondora. We have supported the initiative by offering a wide range of filters and providing extensive data export sets, and we will continue to support those investors in the future by providing a Trading API.
However, as the platform grows, we see an increasing inflow of investors that do not have a need or desire to engage into extensive number crunching. The historic performance of peer lending platforms, and Bondora in particular, indicates that peer lending provides premium returns compared to other assets classes and investors want a simple and easy way to earn those premium returns.
Bondora Ratings bring that simplicity and transparency to investing by assigning each loan application that comes to the market a standard rating, from AA to F (plus HR for the riskiest loans) that represents a range of potential expected losses. Thus, more conservative investors can allocate their capital into less riskier loans providing moderate returns, while more speculative investors can go for higher premium loans with the same simplicity.
Finally, the goal of Bondora Ratings is to unify loans coming from different European countries. Our credit scoring model allows us to price in the country risk; thus, the investors will not need to account for either the economic or political risks associated with Borrower’s country of origin. A loan with an “A” rating represents the same level of risk and potential return irrespectively of whether this comes from a Finn, a Spaniard or an Estonian. We believe that this change will contribute even further to our ultimate vision of a united European peer lending marketplace that we are putting our efforts into.
We will complete the full roll-out of Bondora Ratings until the end of year, but already starting from next week investors will be able to invest using the new system and earn premium return with the help of banking best practices, simplicity and pan-European unification that Bondora Ratings represent.