CROWDLENDING IN EUROPE: A BOOMING INVESTMENT SECTOR

Crowdlending is a form of investment that is gaining more and more popularity in France. If you have read this LiveMentor article published on this subject , you know that it is a very good way to diversify your savings. 

In this context, it would be interesting to look at the possibilities offered by the largest European investment platforms, but also at the pitfalls to avoid in this market.

This article will give you the keys to understanding the European crowdlending market, concrete methods to limit the risks on your investments, as well as a reflection on the differences between French and European platforms, in order to know which ones suit you best. You will find a more in-depth analysis and more advice on the Quelinteret blog .

1. CROWDLENDING: A GROWING EUROPEAN MARKET

In its early days in the 2000s, the crowdlending industry was considered marginal, if not downright dubious, and almost no one would have bet on this sector. Nearly twenty years later, it has not only survived, it has exploded. It has continued to grow since its inception, and continues to do so now, at an impressive pace.

the Crowdlending market

HAS. HISTORY AND EVOLUTION

The birth and development of crowdlending is the result of two closely related phenomena. The first is the rise of the Internet and new technologies in the early 2000s, which led to the birth of the first crowdlending platforms. The second is the subprime crisis, which caused both a crisis of confidence in banking institutions and a drastic tightening of loan offer conditions on their part, as they were themselves in difficulty. Crowdlending thus naturally presented itself as an alternative, which marked a real turning point in the sector.

Crowdlending, as we know it today, was born in Europe, and more precisely in the United Kingdom in 2005, with the appearance of the Zopa platform. Others followed, notably in the United States, where, in 2006, two of the largest platforms in the world were created: Lending Club and Prosper. In France, the first platform, MyMajorCompany, specializing in the musical field, was created in 2007. The sector subsequently expanded to the rest of the world, especially in Asia.

Between 2013 and 2020, the volume of the crowdfunding market increased from €1.5 billion to €22.6 billion, a staggering 15-fold increase. Overall, the volume of transactions has increased steadily since 2013, before a slight decline in 2020, coinciding with the Covid crisis, before a resumption of growth in 2021.

If there are more than 900 crowdfunding platforms around the world, it is Europe that has the greatest concentration, since it has more than 500. For the vast majority, it is about crowdlending, that is to say paid loans. This phenomenon is also reflected in the recorded transaction volumes.

B. TRAPS AND SCAMS, OR HOW TO AVOID THEM

Investing in foreign platforms can be very interesting, both for the purpose of diversifying your portfolio and for profitability. That said, since crowdlending (and a fortiori crowdfunding) is a fairly new sector, there is almost no regulation at the European level. If this situation is expected to change, as we will see below, at present, this market is regulated at the national level. The legal framework therefore differs from one country to another, the logical consequence being that, in some countries, it will be less strict than in others.

Soft regulation induces high risk for the investor. Concretely, the pitfalls that you risk encountering are a lack of transparency, or even a lack of seriousness, when it is not simply a scam.

In France and Spain, this kind of risk is very unlikely. Indeed, the strict regulation allows a drastic reduction in the risk, for the investor, of finding themselves faced with such a situation. France is also one of the first countries to have implemented strict control in this sector.

To illustrate, in 2019 and 2020, several platforms turned out to be either scams, proven or suspected, or dubious companies. Kueztal and Envestio, for example, were fraudulent platforms, promising very high returns, before disappearing overnight, causing many investors to lose money. The same was true for the Monethera and Grupeer platforms, which were the subject of serious accusations of fraud. 

Certain suspicious platforms continue to operate, this is notably the case of Fast Invest and Wisefund. 

Many people have fallen into this trap. Which is all the more unfortunate because with a minimum of caution, this would have been avoidable.

Here are some tips to absolutely apply when you invest in a crowdlending platform. 

First of all, absolutely avoid platforms that do not indicate an address in the footer and that do not have reliable and reassuring information on management staff.

Then, there are a number of red flags that, when combined, become problematic. A single flag will not systematically mean that it is a fraud. Indeed, some very serious platforms may have them. But, broadly speaking, a very young platform, which promises the moon and shows no transparency, becomes very suspect.

Concretely, here are some potential alarm signals that we should be wary of. Once again, we are talking about accumulation here:

    • very high promised profitability, above 15%

    • offices, bank accounts, head offices scattered in different countries

    • a young platform, less than three years old

    • a registered office in Estonia or Latvia AND without an official license issued by local authorities.

    • Reported user complaints regarding takedown issues, for example on forums. 

    • little or no information available on beneficiary shareholders, annual reports or loan originators

    • conditions of use (CGU) containing a clause reserving the platform the right to modify the terms without notice

Also consult reviews and tests, such as ratings on Trustpilot.com, on forums and possibly on blogs.

Applying all of these tips, without guaranteeing infallible protection, will allow you to minimize the risk considerably.

VS. TOWARDS HARMONIZATION AT EUROPEAN LEVEL

This rapid development of the crowdlending market has led European institutions to initiate the establishment of transnational supervision. 

Furthermore, the unfortunate events on the platforms mentioned above have shaken investor confidence and the image of the crowdlending industry as a whole.

These two factors have pushed many platforms to take steps to obtain a local license and thus preserve the confidence of their investors. As of January 2022, there were just over 60% of platforms that held a license. 

At the same time, the European Commission has put in place a regulation, which requires all crowdlending platforms operating in the EU to work under license as a Crowdfunding Service Provider (PSFP, or ECSP in English, for “European Crowdfunding Service Provider”). “), by November 2022. The primary objective is to improve investor protection mechanisms. 

Platforms that do not comply will have the alternative of obtaining an investment brokerage company license (IBF in English).

This European regulation has its advantages, but also its limits.

Among its advantages:

    1) better transparency, in particular through the documentation of proposed loans and project leaders, performance history, expected and actual default rates

    2) strict separation of investor funds from those of the company, to better protect them

    3) a strong deterrent for fraudsters induced by a much greater cost, administrative burden and obligations.

    4) an ease for platforms that want to extend their activity beyond their borders, thanks to unified regulation.

Among its disadvantages: 

    1) penalizing administrative and economic constraints for small platforms. And therefore a risk of imbalance to the advantage of major players. We could therefore possibly expect to see a market shrink and concentrate a handful of platforms, those precisely able to cope with these new regulatory requirements.

    2) this new legislation only regulates professional loans, not personal loans. However, the platforms concerned by the latter are numerous.

    3) this increase in requirements risks both complicating the work of project leaders, but also reducing flexibility and profitability for investors.

2. THE CURRENT LANDSCAPE OF THE EUROPEAN MARKET

France is one of the countries with the highest transaction volume in Europe. However, if we look at the platforms individually, we see a different picture, since the largest platforms are located elsewhere.

HAS. THE BIGGEST INVESTMENT PLATFORMS

Here is an overview of the three most important European platforms, in terms of volume administered. These are, in order, Mintos, Peerberry and Twino. 

We note that October, the largest French platform, is 7th in this European ranking.

I. MINTOS

With a cumulative total of over €8 billion in funding volume, Mintos is by far the largest European crowdlending platform. 

Here are some basic facts:

    • founded in 2015

    • Head office: Riga, Latvia

    • number of registrants: nearly 500,000

    • average interest rate: 12%

    • minimum investment amount: 50€

Mintos is not a credit company but a marketplace, which brings together more than 60 around the world. 

The platform does not depend on the European regulation we talked about earlier, but has an investment broker license (IBF). 

There are two important things to note about Mintos.

The first is that, due to administrative constraints, the platform is currently closed to registration for investors resident in France, for an indefinite period.

The second thing worth mentioning is that Mintos, in addition to having recently made a significant change in the structure of its offer, withholds from its investors a withholding tax of 20%, which can be deducted when filing income tax, with different rules depending on the country of residence. 

               II. PEERBERRY

Peerberry may be the second largest crowdlending platform in terms of volume of loans financed, but it is far behind Mintos, with “only” a little more than 2 billion euros in loans financed since its creation. Unlike Mintos, which experienced a sharp slowdown as part of the 2020 crisis, Peerberry was able to do well, since this period marked very strong progress for the platform. 

Here is some basic data:

    • founded in 2017

    • Head office: Zaghreb, Croatia

    • number of registrants: nearly 60,000

    • average interest rate: 11%

    • minimum investment amount: 10€

Just like Mintos, Peerberry is a marketplace that brings together several loan originators. However, the platform does not hold any license, Croatia having no specific legal framework for crowdlending. That said, Peerberry shareholders have expressed this intention and obtained a license to operate under the supervision of the Bank of Lithuania, for a newly created platform, Crowdpear, which is expected to be operational in the coming months. 

At just five years old, Peerberry is a fairly young platform, which, despite the gap to Mintos, makes its second place in the ranking quite impressive.

It should be noted, however, that while the Covid crisis represented a growth opportunity for Peerberry, the war in Ukraine, on the contrary, dealt a serious blow to the platform, since a significant portion of its partners are in Ukraine and Russia. Peerberry stopped all new investments in these two countries at the start of the war and is actively working to repay current outstanding amounts. So far, 42% of the funds have been recovered.

                III. TWINO

The crowdlending platform Twino has accumulated just over 1 billion euros since its beginnings. Comparable to Peerberry, the year 2020 was a windfall for Twino, which showed good growth over this period. 

Here are some basic facts:

    • founded in 2015

    • Head office: Riga, Latvia

    • number of registrants: nearly 60,000

    • average interest rate: 10%

    • minimum investment amount: €10

Unlike the other two platforms, Twino is not a marketplace. This is a group which issues its loans itself, through its subsidiaries. The platform holds the same license as Mintos, so it is regulated in Latvia.

Also like Mintos, Twino imposes a 20% withholding tax on its investors, which must be declared in the latter’s country of origin to avoid double taxation.

B. THE SPECIFICITIES OF THESE THREE PLATFORMS

We can note some specificities about these platforms.

The first is geographical. Indeed, all three come from the Baltic States. Peerberry is indeed headquartered in Croatia, but the company is managed by Lithuanians and its head office was in Latvia until recently.

A true laboratory in terms of FinTech, this region constitutes a favorable environment for many players in participatory lending, both from a technical and administrative point of view. Among the top 10 European platforms, 8 are located in the Baltic region, or originate from there.

The second specificity found in these three major platforms concerns their business model:

    • they mainly offer consumer loans.

    • they have an “auto-invest” function, which allows for continuous automatic investment, once the initial settings are made. This avoids having to constantly return to the platform to ensure that the funds are invested and continuously generating interest.

    • they offer guarantees to secure loans and maximize profitability (buyback guarantee and/or group guarantee). In concrete terms, these provisions aim to allow investors to recover their invested funds in the event of default by the borrower. It should be noted, however, that this term “guarantee” should be taken with caution. It only works as long as the platforms or loan initiators honor their commitments.

3. WHAT ARE THE DIFFERENCES WITH FRENCH PLATFORMS?

There are notable differences between these three platforms that we have just mentioned and the French platforms.

A. TYPES OF LOANS

Unlike other European players (including those we have just seen), personal loans are very poorly represented in France. Younited Credit is the only platform to offer them. In France, almost all investment offers in participatory loans are oriented either towards commercial loans (often focused on an environmental impact) or towards real estate. 

Furthermore, the minimum investment amount will generally be higher in France. For the top ten platforms in the Eurozone, almost all have a minimum investment amount of €10.

Finally, regarding personal loans, the difference in profitability is, to say the least, significant. If in France, one can hope to earn between 2% and 3%, these other European platforms are rather around 10% to 12%. 

B. REGULATIONS

This difference in profitability for consumer loans is explained by the fact that many loans are so-called “payday loans”. These are usually very short-term loans (often one month) for small amounts (€2,000 or less), which come with extremely high interest rates. It is not uncommon to see annual rates above 200%. 

Let’s take an example. With an annual rate of 180%, for a loan of €1,000 over a period of one month, the total amount of interest would amount to €150. This type of pricing would be unthinkable in France, but in many countries, it is a very common practice.

C. IS IT BETTER TO INVEST IN FRENCH PLATFORMS?

Each investor has a different profile, depending on their personal and financial situation, their aversions and their priorities. French platforms have advantages that other European platforms do not have, and vice versa. Before investing in them, it is essential to know yourself, to know the platforms to consider, in order to best weigh the pros and cons.

The advantage of French platforms:

    • precisely, they are French. It’s often reassuring to stay within the national fold. Furthermore, the crowdlending sector being highly regulated in France, this constitutes additional protection for investors.

    • the declaration of income linked to these investments is facilitated, since in principle the communication channels in this sense are largely simplified

    • we invest directly in the French real economy, thus participating in its support

The advantage of other major European platforms:

    • geographic and sectoral diversification, and therefore smoothed risk

    • increased profitability, thanks to high interest rates and various guarantees on the capital invested

    • easy access for small budgets, thanks to a low entry ticket

Again, the choice of investment platform(s) depends heavily on your profile. 

However, whether in France or elsewhere, in crowdlending or even in other asset classes, it is important to diversify your investments, for a portfolio that best combines stability and profitability.

THE FINAL WORD

If France is a European pioneer in crowdlending, it is today far from being the only one in this market, which is constantly evolving. European platforms can have their place in your portfolio, to diversify your savings and optimize your profitability, provided, of course, that you carry out a minimum of prior verifications. 

If there is one thing to take away from this article, investing in crowdlending can be very interesting, but be careful of scams. It’s important to understand the market and not go in blind. 

Any investment involves risks, participatory loans are certainly no exception to the rule. Its promises of profitability, combined with great accessibility, can easily lead you to lack caution. In a context in which the legal framework is still being put in place at European level, it is important not to do anything.

If you have experience investing in crowdlending as well as tips for limiting risk, don’t hesitate to share them in the comments! To go further, and to get more advice, you can consult the blogquelinteret.com .

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