Among the biggest criticism P2P companies receive is consistent aggressive marketing. It takes full advantage of the low financial literacy from the majority of P2P investors to present significant risks in a mitigated manner. Crowdestor followed such path. Not anymore. They are moving in the right direction.
Crowdestor: Platform Status Update
Janis Timma is among the most engaged and ambitious P2P platform CEOs in the industry and he’s aiming to building the leading business crowdfunding platform in Europe. To achieve that, the Crowdestor team is making major changes with significant impact on the way investors evaluate risk. Crowdestor is among the P2P platforms capable of building a strong community of investors that allowed them to overcome the COVID-19 period and remain strong. In fact, they actually promoted fundraising directly from investors to fund their growth. Like PeerBerry, or Robo.cash was able to combine financial transparency, a stable presence of the CEO in direct communication with investors, and operational capacity to deliver value to its ecosystem.
Provision Funds and Buyback Guarantee: Simple Marketing?
The lack of regulations in the European P2P industry allow less transparent marketing strategies from platforms that want to offer investors “safety options“. This results in hard to justify or verify provision funds or buyback guarantees to “safeguard” investor’s money in the case of defaulted projects.
The reality is that most of the so called provision funds and buyback guarantees are just marketing, supported by empty words. Offering a buyback guarantee is among the top features that investors demand from a platform. Without regulatory oversight, it is easy for P2P platforms to present such feature without real capacity to cover such guarantees.
Crowdestor: From Marketing towards Reality
The Crowdestor approach was to offer what was called Buyback Fund. And words matter… By providing a buyback fund the majority of investors believed that their investments would be covered in case of default, even if Crowdestor was very clear, since the very beginning, that was not the case.
The Buyback Fund Method:
In case of a default, the total amount of the funded loan for this defaulted project would be converted to a percentage of the total amount of all the outstanding loans. The amount of funds was split between the investors of this project accordingly. See the example below:
- A funded loan amounting: 100’000 EUR
- The total amount of all outstanding loans: 20’000’000 EUR
- BuyBack Fund Status: 360’000 EUR
1) 100’000 / 20’000’000 = 0,5%
2) 360’000 x 0,5% = 1’800 EUR
So, in this case, the total amount of 1’800 EUR would be split up and distributed to the investors in proportion to the amounts invested by them. This represents a ~98% loss for investors. Not bright for a P2P investment, right? But Crowdestor presented such risk in its platform to all to see.
The problem is that the majority of investors don’t understand the meaning of what is presented in such a clear manner on the numbers above… and that is a problem.
From Buyback Fund to new Provision Fund
To increase transparency on the risks Crowdestor decided to change the name from BuyBack Guarantee Fund to Provision Fund. But at the same time, they also changed the calculations, lowering the costs for Crowdestor in the process, but increasing 10x the recovery value per project.
“Global default rates depend strongly on the loan model and risk category of the borrower. While the average P2P default rate is around 12%, P2B platforms are considered safer, and with an average default rates on platforms varies between 1% and 10%. We are implementing 10% in the calculation of the amount to be reimbursed by our Provision Fund.“
Crowdestor Provision Fund communication
The Provision Fund Method:
- A funded loan amounting: 100’000 EUR
- The total amount of all outstanding loans: 20’000’000 EUR
- Provision Fund Status: 360’000 EUR
1) 20’000’000 x 10% = 2’000’000
2) 100’000 / 2’000’000 = 5%
3) 360’000 x 5% = 18’800 EUR
So, in this case, the total amount of 18’800 EUR will be distributed to the investors in proportion to the amounts invested by them. This represents a ~80% loss for investors. An improvement right?
But among the most interesting aspects shared, is that Crowdestor is devoting a commission of 0,5% from each of the projects that have been funded via the platform into the Provision Fund. Before the amount was closer to 1%. This is a significant saving for the platform and a lower growing rate for the Provision Fund.
Crowdestor states that “it was never an intention to mislead the investors and it is important for investors to understand that the invested principal would not be reimbursed in full amount“. In any case, this is a positive move towards avoiding investor mistakes and increase transparency of the true risks of the platform high interest rates. A cautionary tale for the future of the industry.
What do you think of Crowdestor?
Crowdestor is among my guilty pleasures. I know the risk, but I like the aggressive approach followed to grow. I will reduce my exposure over time, but for those looking for a wild ride, it’s definitely among the best options available. What is your personal opinion on the future of the platform? Will you decide to invest or avoid it? Why? It will be very interesting to learn your opinion on this topic.
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