Happy Anniversary: 3 Years Smava Lending

Smava.de launched 3 years ago and successfully established p2p lending in Germany. Since then about 25 million Euro (approx. 34.4 million US$) loans were funded. Smava  gained nearly all positive feedback by lenders, borrowers and especially the media.

Smava will need to continue growing considerably in order to become profitable. Currently growth is limited by borrower demand. On the lender side there is much capital waiting to be invested.

One issue Smava will have to tackle in the future are the default rates that distinctly exceed originally forecasted values. So far these have not been a threat to growth because  the ‘Anleger-Pools‘ mechanism, an insurance mechanism spreading losses resulting from defaults over many lenders, prevented major losses for single lenders. In the past years nearly all lenders achieved positive ROIs.

The P2P-Kredite blog has published a longer analysis today: ‘3 Jahre Smava Kredite – eine Bilanz‘ (in German).

Smava Offers Debt Conversion

Recently p2p lending service Smava.de introduced a new offer aimed at borrowers that want to refinance a loan they have at a financial institution. If the loan request at Smava is funded by lenders, Smava will deal with the financial institution directly acting upon a certificate of authority signed by the borrower.

The loan amount of the new loan is not paid out to the borrower – instead it is directly transferred to the financial institution paying off the previous loan.

There is no extra charge for this service (the normal loan fees apply). Smava makes it easy for the borrower to replace conventional bank loans by peer-to-peer loans.

(Source: P2p-Kredite.com)

For Debate: Can Data from Social Networks be Used to Reduce Risks in P2P Lending?

P2P Lending is mostly anonymous and loans are unsecured. To make the risks of lending to a stranger acceptable for lenders, p2p lending services had to provide models for the lenders to judge the dimension of the risk of not getting paid back.

The initial estimation of the risk-level could not come from the platform itself as it had no track record and could not build a model that “calculated” the level of risk involved for the lender. The consistent consequence was that nearly all p2p lenders relied on established third party providers for credit history data and credit scores. Prosper for example showed Experian data on default levels to be expected depending on credit grade.

Over the time it became obvious that the actual default levels at Prosper were much higher than the expected default levels based on Experian data. We don’t actually need to argue here what led to this (be it financial development of the economy, be it that p2p lending attracted bad risks, be it a poor validation process), but the result was that since defaults were much higher than expected, lender ROIs were much lower than expected at the time of the investment.

And this is not Prosper specific. Several other p2p lending services show clear signs that default levels will (or have) surpassed the initially published percentages of defaults to be expected based on external data.

Boober failed due to default levels, on Smava levels are higher than the Schufa percentages fore-casted, same is likely for Auxmoney defaults which will be higher then Schufa and Arvato Infoscore data suggested. The one exception from the rule is Zopa UK, which successfully manages to keep defaults low, as CEO Giles Andrews rightly points out.

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Smava Poland: Cooperation with Financial Consultants as Offline Sales Channel a Success

In October Smava Poland (Smava.pl) entered a cooperation with Euro Finanse, an independent vendor of financial products and services. Smava says the cooperation already yields very positive results. The first three weeks of cooperation brought a 50% growth in loan volume.

Euro Finanse was selected as partner due to it’s sales strength and presence not only in the large cities but with 450 financial consultants throughout the country, says CEO Przemysław Moscicki.

Apart from sales activities the consultants can handle additional tasks like verifying identities of borrowers in person and validating income statements.

To my knowledge Smava.pl is the first p2p lending company to use an offline sales channel to sell the service.

Peer-to-Peer Lending Headline Potpourri

Deutsche Bank Research released a new e-banking snapshot focusing on p2p lending. Notable trend is a shift to automated bidding (vs. manual selection of single loans). Interesting results are the findings that loans with longer loan descriptions have a higher default risk (at Lending Club) and that lower cost are not the only motivation for borrowers to use p2p lending services (offers by banks might actually be cheaper).

MYC4 is still struggling with the situation of it’s local provider Ebony in Kenia.  After some issues raised questions, MYC4 attempted to investigate Ebony’s portfolio. However when MYC4 attempted to perform an announced audit at Ebony’s premises in Nakuru accompanied by 4 auditors of KPMG, they were denied access. MYC4 filed an application in court in order to get access to the files. However on October 30th the court postponed the case until December.
Kiva had paused Ebony last year after unsatisfactory results and defaulted all Ebony loans last month.

In Germany p2p lending usually received positive to enthusiastic press coverage in the past. Today’s article in Handelsblatt (a financial newspaper) online edition has a more critical tone, pointing at fee structures of one service and wondering why the German Bafin (the regulation authority) sees no need to monitor activities of p2p lending companies more closely. The article does also cite positive recommendations of consumer advocates for Smava.

The New York Times picks up the story of an earlier blog post by David Rodman (‘Kiva is not quite what it seems‘) that started a discussion on transparency and marketing messages of Kiva around the question if Kiva lenders are really aware that they do not lend to the entrepreneur pictured but rather to the MFI which may/will use the money to fund other loans.
Since the blog post Kiva has changed it’s tagline on the homepage from “Kiva lets you lend to a specific entrepreneur, empowering them to lift themselves out of poverty.” to “Kiva connects people through lending to alleviate poverty.