Is P2P Lending A Scam? Here Is Why It’s Not!

P2P lending is an emerging investment type. Investors has been able to fund loans since the first P2P lending platform Zopa launched in 2005. However, conditions in the European market has the investors speculating whether P2P lending is a scam. Is P2P lending a scam? It is hard to tell. Nonetheless, a general discussion of both why P2P lending is a scam and why it is not a scam is made throughout this post.

The P2P lending business model is not a scam. However, due to lack of regulation some P2P lending platforms have used their operations to scam investors. It is impossible to say which platforms will not turn insolvent, but due diligence could reduce the chance of entering a fraudulent platform.

Whether you are already a P2P lending investor or is trying to figure out to start or not, this post should come with some thoughtful considerations about the sector.

Why P2P Lending is Not A Scam

P2P lending was “invented” in 2005 by Zopa. They launched their platform back in 2005 where investors had the opportunity to invest in loans to other individuals. Zopa is one of the only P2P lending platforms who are participants of the FCA regulation. To put it simple the FCA regulation is a regulation for businesses offering investments (both buying and selling), credit, lending money, collecting debt, etc. Everything a P2P lending platform should be needing.

Most of the European P2P lending platforms are however not regulated or only I mild forms. An example is the Estonian P2P lending platform Estateguru. Estateguru is under supervision from the Lithuania financial market as a “crowdfunding platform operator”. What is the supervision terms covers is impossible to uncover, but they have some mild form of “regulation”.

Estateguru and Mintos are two good/better examples of platforms who try to prove their legitimacy. Estateguru and Mintos are both public companies which means they are required to publish financial statements. This way the public can also get an inside to what happens in their financiers, and not be limited to the accountant during their financials.

While it is not possible to predict which platforms are fraudulent who offers transparency can be seen as legit. E.g. Estateguru offers high levels of transparency in their ways of making money, financial statements, addresses of project collateral, contact information on borrowers, etc. They are taking an active approach to show their transparency.

I have been publicly displaying what I have earned for over a year now. What you will find is that some platforms still exists (even some that probably should not). I take the risk of P2P lending because of the double-digit return and my age. If I lose €5.000 in P2P lending it won’t have a big effect on my life since I have plenty of years to recover. Furthermore, I only invest what I can afford to lose. You can see my progress and investment at my monthly income updates.

I have made a rating on P2P lending platform based on qualitative and quantitative measures. Most bloggers just use gut feeling to rate platform. I have tried to make more reliable P2P lending platform rating.

Why P2P Lending is A Scam

The state of P2P lending is new, especially in the European Union where regulation is currently only talk with no actions. given the current pace of regulation in P2P lending from the European Union, P2P lending should probably not be a consideration for most average investor. P2P lending should only be considered if you have “fun money” which you would try to have in speculative investments.

Sadly, the P2P lending sector has already been exposed to scams. The first time as in the Asian region. There where a total of over 4000 platforms, over half got dissolved due to insolvency or fraud. This emerged back between 2015 and 2017.

In the European region, four platforms has gone out of business. None has been committed to fraud. Nonetheless, investors are arranging lawsuits against the different platforms. The current platforms accused of scamming/fraudulent activities are Envestio, Kuetzal, Grupeer and Monethera. While none of them are convicted, there is compelling evidence that some of their operations where fraudulent.

One way to get some proper knowledge is by following people who are deeply involved with the industry. PeerDuck is the alias of an anonymous “whistleblower” from the Eastern Europe. You can follow his/her twitter here and his telegram channel here.

Scams In P2P Lending

P2P lending has a very limited time horizon for historical events to draw a pattern. However, the scams from China and the Asia region has seem to infiltrate the European region. So far the fraudulent platforms are all operated and founded from the Baltic region.

As of writing this post, many platforms face serious questions from their investors with speculation of insolvency or even fraud. Mind you this is written in the Coronavirus crisis.

P2P Lending Timeline
P2P Lending Timeline

The timeline show the evolution of how P2P lending emerged to the collapse of the Asia region, and now potentially the European region. While there is not 4000 European P2P lending platforms, looking into the Chinese P2P lending collapse could maybe help to predict the future of P2P lending in Europe.

So what happened in China? The whole online P2P lending started in 2007 in China. From there a rapid grow emerged in the market serving many borrowers at double-digit interest rates.

The number of platforms began to rapidly increase and by 2015 more than 4000 platforms were operating in China. During the collapse, more than 2000 platforms closed down. Followed by regulations many P2P lending platforms are seeing great financial distress and are struggling to survive.

Defaulting P2P Lending Platforms In China

It is clear that Chinese P2P lending platforms are struggling to keep afloat. So what is the lesson learnt from the Chinese P2P lending market? If the regulation is getting to extensive P2P lending platforms might not have the financials or resources to fulfil their obligation. On the other hand, if the regulation is not present it will invite shady businesses to operate and scam investors.

What is needed in Europe is therefore some fair regulation. It should be possible for the P2P lending platforms to operate, likewise, it should also be to a degree where the P2P lending platforms can’t hide and take fraudulent actions without consequences.

How European Platforms Scammed Investors

Envestio: Envestio was a business lending platform which issued loans with interest rates of +15% per project. The most common interest rate was around 18%. The platform itself was not that transparent. The information provided about the projects where mediocre, and completely lacked information about any of the borrowers (besides their projects). Looking at the management, the employees seemed to have some management experience within the financial sector and therefore should have been able to run should a business. However, in mid-January of 2020, their website went offline from one second to another. Since then there has been no contact with Envestio and investors has formed a lawsuit against them. Telegram link to discussion channel:

Kuetzal: In November 2019 some investors began to investigate some of the projects that was posted on the platform. The project that started the whole community investigation was the Alborg Patrol project. It was later found that multiple projects were fake and the creators of Kuetzal sent an email to all investors stating a complete wind-down. Furthermore, they claimed that their banks had received reports of their actions and therefore their accounts had been frozen until further notice. The community has started a lawsuit against Kuetzal for fraud as well. Telegram link to discussion channel:

Grupeer: Grupeer seems to have been involved in embezzlement. Besides finding at least 3 loan originators and projects were fake, reaching out to many of the loan originators confirmed that there never were any partnerships between Grupeer and the loan originators. The evidence can be seen in this Google drive folder. Telegram link to discussion channel:

Monethera: Monethera is a platform like Envestio and Kuetzal. Business loans and very high-interest rates. Monethera went fine until the Coronavirus of 2020 hit Europe in about February/Marts. Since then Monethera had problems with withdrawing investors funds. however, the obvious problems started back in December where Monethera announced they have started a partnership with a company in Hong Kong who would gladly buy defaulting loans. They would buy 95% of all the investments. Furthermore, the same Hong Kong-based company was dissolved in 2018. Monethera has now blamed the Coronavirus for killing their business and they will shut down to the economy stabilizes again.

What To Look For To Avoid Being Scammed

While it is not an easy process to due the due diligence from a computer, it is the best thing you can do if you are not employed or live nearby the offices of the platforms.

What To Look For To Avoid Being Scammed In P2P Lending
What To Look For To Avoid Being Scammed In P2P Lending

I have my due diligence process and you might have yours. However, here is what I look for:

  • Team and Organization: Management, financials, organizational structure, etc.
  • Investor reviews: Trustpilot is a good benchmark for initial review.
  • Track record: Years in business, defaulting percentage, etc.
  • Cost structure: How does the platform earn money?
  • Transparency: A combination of the above. How easy was the information to retrieve, did I have to browse forums to find information, etc.?

Team and Organization: Just when investing in stocks, the management is a huge role in how the business is operated. When trying to avoid scams one of the best things to do is to google the management to see if their names appear in new articles related to fraud or scams.

An example of this is the P2P lending platform Fastinvest. The owner of Fastinvest called Simona Vaitkune has previously been a board member together with her mom, boyfriend, and former CEO of Fastinvest in a bankrupted credit union called “Taupkase”. There is suspicion of embezzlement, accounting fraud and strange money lending practices. You can google to find the details yourself. This is an example of why it is important to know the management and the established team of a business.

Investor reviews: This is a rather weak indicator of scam or fraud as the investors will only know when the exit has happened. However, joining different P2P lending investor forums or searching Google for investor experience (e.g. bloggers) will provide some initial impression of the platform.

Track record: Again to reference the stock market, the longer the track record the safer the investment is. If a stock has continuously increased their dividend for 25 years, they will most likely continue to do so. While P2P lending is not the same as stocks, track record is important for any investment type. It is important to keep in mind when looking at the track record of a platform that the maximum age of the platform will most likely be less than 10 years. The first platform was founded in 2005 and many platforms are rather now.

However, another thing which can be helpful to look into is the statistics of the platform. This covers the amount of loans funded per month, default rates, average interest rates per loan type, average late periods, etc. Some platforms lack to disclose such information but trying to communicate with the platforms can help at times.

Cost Structure: Disclosing the cost structure of the platform helps to understand how they make money. This can help you evaluate their margins if they are not public companies (i.e. their financial statements are not publicly available). A good example of disclosure of the cost structure is Estateguru, under their “price list” all the costs associated with investing and borrowing is listed.

Transparency: Now to the most important of the due diligence process. How transparent is the platform? Do they have any licences? Did you have to go on google to find any of the above information? How much information was the customer service willing to give you? All these questions (and many more) should be asked to evaluate whether this is a company you can trust your money with.

Disclaimer: This post may contain affiliate links. I may receive a commission when you, the visitor, uses an affiliate link. Investing involves risk of losses.
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I am ThePoorInvestor and I am on a financial independence journey. I am investing in P2P-lending to create a high cash-flow return. I disclose my income, expenses, investments, and everything financially relevant.
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