DoFinance is in the middle of restructuring their platform in the wake of problems induced by the Covid-19 pandemic. Learn about CEO and Co-Founder Jänis Kulikovskis’ take on the marketplace lending industry, why he chose to enter the FinTech industry, and what plans DoFinance has for the future.
The Story of DoFinance
DoFinance is owned by Alfa Finance Group that was founded in 2015 and run by you and your brother Viesturs Kulikovskis. Are you and your brother the only owners of Alfa Finance Group? How did you come up with the idea of DoFinance, and why was it founded?
Currently, Janis and Viesturs Kulikovskis are the only shareholders in the company. Initially, we had a minority shareholder, but he left the company.
I got the idea to start this project already back in 2014. My brother Viesturs had a banking background, and we decided that it could be a good fit for a start-up fintech company.
The thing was that my brother and I were quite successful at our businesses, and there was some sort of “Fintech” boom in Northern Europe, and specifically Latvia. The majority of Fintech companies that are very well known were set up approximately at the same period. Of course, it caught our attention, and we decided to give it a try, and Alfa Finance Group was started. Immediately, I recognized an opportunity by having business experience in the Far East, and back then, nobody was brave enough to tackle that region. Hence, I thought that it would be a great idea to use the knowledge and experience of the Fintech industry and combine it with experience in other regions. The initial purpose of DoFinance was to serve and bridge a gap in the Far East and fund lending businesses there. Back then, countries like Indonesia, Vietnam, Philippines were very much underserviced by the financial industry, so there were a lot of opportunities for Fintech businesses.
How did you finance DoFinance in the beginning? Does DoFinance have the same owners today?
DoFinance and the whole Alfa Finance group were funded only by the funds of its shareholders – me and my brother. In 2015 when Alfa Finance Group started its operations, my brother and I invested a capital that was accumulated in our other businesses – real estate development and international trade of commodities. Up until then, we had been working together in some real estate projects where one of the partners was even Lehman Brothers investment bank. Even though that bank has a rather bad reputation – it introduced us to businesses that were far above the usual scale of any business in Latvia back then. Also, I was involved in the international trade of commodities in South East Asia. This made me recognize the huge potential that the region holds in terms of population size – Indonesia has a 250m population that is severely underserviced by all financial institutions.
Initially, we invested around 1m EUR to set up both the lending operations in Poland, Indonesia, and in 2016 DoFinance was launched. In the beginning, we were operating with our capital, but later on, additional capital was attracted from friends and family to further develop the business.
What other activities does Alfa Finance Group have?
After going through the COVID19 crisis, Alfa Finance is heavily involved in developing new lending products in SE Asia. That is the region that was affected the most by the COVID pandemic at its very early stages but is more successful in handling it now. Plus, that region is still underserviced and has immense opportunities. Within the next 2-3 months, Alfa Finance Group will announce information about the new project that it is now developing that will be related to the funding of special kinds of services! We will keep you posted, but currently, it is highly confidential due to the parties involved. To put it in a nutshell, Alfa Finance Group is doing both investment management as well as lending activities. The ultimate aim is to provide a wide range of financial services and hopefully become a neo-bank.
Handling the Covid-19 Pandemic
How have you been affected by the Corona crisis? Have you taken any specific steps to handle the crisis?
Alfa Finance Group was heavily affected by the pandemic in all possible aspects. At some point, the wisest choice would have been to surrender – what many Fintech companies actually did. But our family businesses had never failed, and we were not in a position to allow this one failing neither. The steps we took were the following:
1. Cutting costs that were primarily related to human resources.
This was one of the hardest because we did lay off around 60% of all employees in the whole Alfa Finance Group. In total, it was 126 colleagues, and in some cases even friends. Due to cost-cutting, some positions were taken over by the shareholders. There was a point where I was CEO, Marketing, Operations, Debt collection, IT support, Customer care manager all at once. To sustain operations, this had to be done, and duties had to be reorganized.
2. Cutting all and any other costs;
We reduced expenses everywhere – in human resources, office space, third-party services, and anything else. We started doing everything by ourselves and avoided any third-party services as much as possible. The total cost reduction in the group is down from 300k+ EUR a month to 120k EUR.
3. Stopping business activities in any area that may be loss-making;
Alfa Finance Group suspended its operations in Poland that were affected both by the pandemic itself as well as by unfavorable regulations of the Polish government, which in some cases were on the border of being constitutional. As a result, since June 2020, Alfa Finance Group is again running a profitable business even on a net profit level.
4. Inject additional capital.
Apart from all of the above, we did steer a lot of capital from all other family businesses into Alfa Finance Group, including DoFinance. That was done to, firstly, sustain steady cash flow, and at a later stage, to fund the growth of the business. Growing the business is our ultimate aim since now we have learned a painful lesson, and we have managed to become a much stronger, leaner, and way more profitable business than we have ever been. Up until today, an additional 2m EUR has been invested since June 2020.
5. Finally, all of this was done with one sole purpose – not to let down the remaining employees, investors, and anyone relying on our business.
Investing at the DoFinance Marketplace
Could you briefly explain what type of investing you offer at DoFinance?
DoFinance currently offers the possibility to invest in consumer loans originated in Indonesia. These are short-term loans, hence the Loan Originator has a good possibility to monitor the borrowers’ sentiment and adjust the risk policies, respectively. In the next few months, DoFinance will offer other investment opportunities in longer-term loans and special purpose loans. These will carry slightly lower interest but will also have a substantially lower risk. As mentioned earlier, the Loan Originator that is placing its loans in DoFinance is currently in the development stage of these other loans, and it is predicted that they will be available very soon. Currently, DoFinance is offering to invest in consumer loans giving a yield of 13%. It is worth mentioning that DoFinance is calculating interest even if the loan is delayed but not yet paid back. Consequently, the investor will never receive less than 13% interest per year.
You currently offer three different investment products: DoFinance Secure, AutoInvest 9%, and AutoInvest 11%. Besides the obvious variation in annual interest rate, could you explain the difference between these products?
Actually, we have switched from three different investment products to two new ones recently. The main reason was to simplify and make the new programs more competitive when it comes to other P2P investing platforms, as well as we had noticed that investors were more interested in 11% than secured or lower return rate-based programs previously. The statistics showed us that secured investment is not what casual P2P investors are looking for. Therefore 10% and 13% are available now for new investors! Currently, both programs differ by the period of investment. Higher yield investment programs have a longer minimum investment period. The logic behind this is very simple – to have more predictable cash flows.
At the moment, you do not offer loans from Poland and Georgia, but only in Indonesia. Why is that? When did you decide to withdraw from Georgia and downscale operations in Poland?
The main reason for stopping operations in Georgia and Poland was regulatory. Meaning in 2017, we exited the Georgian market due to the high uncertainties of the regulator and its terms of the lending industry at that time. Regarding the Polish market, regulations were already in force for a while, but additional ones came up in the late stage of 2019, and the pandemic was around the corner. Therefore the Loan Originator did not want to take additional business risks, and the decision was made to stop the operations in Poland as well. The revenues that the Loan Originator can generate in Poland are low compared to risks that are there due to the pandemic. Also, Poland is not doing well in terms of managing COVID19 cases. On top of all that, there is very high political risk in Poland since the financial regulations are favoring banks and putting barriers to a disrupting industry – Fintech. For example, the interest rate is capped for all businesses, except the providers of credit cards (banks).
How come you don’t operate in Latvia when your company Alfa Finance is registered there?
There are several reasons why Alfa Finance is not operating in Latvia. One of them is for sure the saturated market situation as well as restrictions from local regulators when it comes to short-term loans. Nevertheless, Alfa Finance Group is servicing its subsidiaries in other countries and utilizing the vast amount of know-how and intellectual capital that exists in Latvia. Due to the high concentration of different Fintech and related businesses, it is a great place to set up knowledge-based operations.
If I decide to place money at DoFinance and build a diversified portfolio, how much can I expect in net yearly return after losses and delayed payments?
Historically, the average annual return rates have been 10.58%. After COVID19, DoFinance has redefined security policies as described in the FAQ sections related to buyback policy. Consequently, unless there is another pandemic, the investor can expect to earn as much as 13% per year, while if reinvesting the interest, then the total yield can be even bigger.
You have an instant buyback guarantee covering all available loans and a DoFinance Security Fund that covers investments in the DoFinance Secure programme. How does the buyback guarantee and the Security Fund work? How does it affect the risk faced by investors?
By default, the buyback works as follows – if the loan has been issued for 30 days and the loan has reached 60 days past the due date, it means that the Loan Originator must ensure buyback of such loans. The Loan Originator has signed a long-term contract for the sale of delayed portfolios to a debt collection company. Hence, it must sell the delayed portfolio, and that will ensure that investors receive a buyback and that there will be funds for it. The buyback policy is elaborated in the FAQ section of DoFinance’s website, but in essence, it is built to ensure the sustainable operations of the business. Regarding security funds, it was available only for the ‘DoFinance secure’ investment program, where 5% of each invested amount was transferred to a separate account and served as security for investors who selected this plan. However, this plan is no longer available for new investments due to very low interest in low yield investment plans with higher security.
How do you choose which loan originators to cooperate with? How do you make sure that the loans listed on DoFinance are safe for investors to put money into?
The Loan Originators where DoFinance investors are offered to invest are related to Alfa Finance Group. Hence the whole group is involved in making sure that these Loan Originators and loans are safe to invest in. According to our understanding, we did manage to get through the COVID19 pandemic, even though we face very harsh conditions. We have built a more secure business by implementing additional steps in borrower verification, including a custom-made fraud detection tool, adding extra layers of data checking in external databases by verifying the identity of the borrower, and creditworthiness. The Loan Originator has substantially decreased the acceptance rate of the borrowers having it only at 10%, hence only 10 out of 100 new borrowers receive the loan. Additionally, Alfa Finance Group has substantially increased its share (skin in the game) in the loan portfolio, having it currently at 30%.
If the unlikely event should occur that DoFinance goes out of business. What will happen to the investors’ money?
DoFinance is currently on its way to obtaining an Investment Service Provider license. Consequently, DoFinance cannot go out of business without a reason. Even though the Latvian Financial and Capital Market Commission is reviewing DoFinance’s application, already now DoFinance has to adhere to the existing rules for a regulated company. It is worth mentioning, however, that investors are not protected by the depositor compensation scheme at the moment. Once DoFinance obtains the license, there will be specific situations when investors will be entitled to certain financial security.
The Marketplace Lending Industry
Who do you see as your biggest competitors, and what sets DoFinance apart from them?
Nowadays P2P investing platforms have become popular and well known among investors. In the meantime competition between P2P platforms has also grown rapidly. DoFinance and its values are always about the transparency and honesty of its investors. We are glad that all loan originators that were operating and currently active are in the Alfa Finance Group as subsidiary companies, meaning the strategy is to keep all of them financially healthy. This is also the main driver for our investors who have shown trust in us during these years of our operations. However, we are competing with the other P2P investing platforms such as Mintos, Twino which also are localized here in Latvia.
What do you think the future of marketplace lending looks like? Which challenges do you see for the industry in the coming years?
Marketplace lending is already disrupting the financial industry. It has already gone through the first global crisis that is comparable to that of 2008. This is very important because during a crisis one can see the weak spots in any industry. As we did notice, an important aspect in this industry is common regulation and supervision by government institutions. Whenever there is some marketplace lender that struggles or is fraudulent, the whole industry suffers. It is in our highest interest to have all operators regulated by the Financial Supervision Authority in any country across Europe. We hope to be the forerunners in Latvia in this regard. Once this happens, banks will have to hold tight to their seats….
The Future of DoFinance
What is DoFinance’s strategy for the coming years? Have you planned any new initiatives? Do you have a vision for the future?
At the moment, our goal is to maintain our existing investor portfolio and, of course, attract new investors, which we are now able to do quite successfully. In terms of platform improvements, we plan to introduce secondary market functionality in Q3. At the same time, an important factor is the licensing process, which has already started in April 2020, and we are likely to obtain a license in Q4 2021. After licensing, the only objective will be to diversify investment opportunities, including special purpose loans, real estate related products, and investments into trade finance.
If we look ten years down the road and DoFinance no longer exists: What went wrong?
Looking at our company today – it seems highly unlikely. I would see our company transforming but not disappearing. Funny enough, I think any fintech company wants to become a bank in the end. But in this case, the bank is not a clumsy and heavy institution; it is rather a financial organization providing a wide range of services that are currently provided by the banks.