Income Marketplace is a new, upcoming peer-to-peer platform with great ambitions. The platform want to provide highly-secured loans from emerging markets, and strives to make investor safety their trademark. We had a talk with the CEO and Co-Founder Kimmo Rytkönen to learn more about their newly launched platform. In this interview, Kimmo will also share his views on the future of marketplace lending and how they strive to offer an institutional investor level security structure compared to the traditional Buyback Guarantee.
To learn more, read the Income Marketplace analysis or get a quick overview of Income Marketplace.
The Launch of Income Marketplace
Income Marketplace is a recently launched platform, so many investors will probably not know much about your background story. Could you explain a little about who came up with the idea of Income Marketplace, and why it was founded? How is the ownership structure?
I’ve been in consumer finance for over ten years, and after exiting my previous venture, I started investing into existing P2P marketplaces. When the 2020 crisis hit them, it became clear to me that P2P investors were insufficiently protected, and that significant amount of retail investor money was at risk. I luckily escaped from the existing platforms without losses but at one point I was afraid I’d lose a significant part of my P2P investments. Drawing on my experience with the existing marketplaces as an investor and experiences from my consumer credit career, I thought there is a problem to solve on the market. So I came up with the idea of combining security measures that institutional investors use with companies that provide consumer loans or other types of financing. The ultimate goal with our platform is to enable safer peer-to-peer investments into different asset classes, the first of them being loans, as that is an area in which I have many years of experience.
Meliina Räty, Mikk Läänemets and I are the founders of Income Company. While I am the CEO, Meliina is COO and Mikk is General Counsel at Income. We have received investments from early-stage investors, Change Capital and Dr Karlheinz Hauptmann, as well as from some friends and family.
How have you handled launching a platform and assembling a team in the middle of a pandemic? Have you had a good start despite the obvious challenges you have been facing?
I don’t think the pandemic has affected the development of our product much and building a team was surprisingly easy as people are already accustomed to working from home. The launch has gone well and while we recognize there are still some little things to improve we can be happy considering the very short period from idea to launch.
Investing on Income Marketplace
Could you briefly explain what type of investing you offer at Income Marketplace?
During the first phase, we offer consumer loans for investing. Our long term goal is to expand on the offering and enable safe investments in different types of cash flow–generating assets. At launch we have two Loan Originators offering their loans, and we are currently onboarding more, which include a factoring company and SME lender. We are actively looking for more companies and assets to list, and we have seen there is significant interest on the market from loan originators for finding other sources of funding, such as our marketplace.
We’ve also designed the product and processes to fit institutional investors, and we are currently observing a growing interest in P2P and Income on the part of wealth management companies and family offices. I think P2P can offer competitive yields also for institutions. A good mix of institutional and retail investments can be a really positive way to increase liquidity on the marketplace, which is why we took this into account early on when starting to develop the product.
If I decide to place money at Income Marketplace and build a diversified portfolio, how much can I expect in net yearly return after losses and delayed payments?
We have built our marketplace from a better investor protection point of view instead of aiming for the highest annual returns. Thus, we are not the marketplace for the highest yield but for sustainable investments. Personally, I think that too high interest rates lure investors to riskier investments and at the same time make it difficult for good loan companies to get funding at reasonable funding cost. Following this logic, we are capping the maximum interest rate payable to investors to 12% per annum. On the other hand, for the loan originators to give higher security and real collateral to investors, they expect their funding cost to go down. This is something investors have to take into account when comparing marketplaces. We aim to provide a steady and safer P2P investment cash flow with lower yield but a higher level of security.
So at launch, you can expect to earn 12% per year. However, we expect it to decrease below 10% in a reasonable time to reflect the added security requirements. It’s also worth mentioning we calculate interest according to a 365-day year and based on the actual days your capital was invested, similar to any institutional lender. We noticed how annoyed investors were at pending payments and grace periods on some marketplaces and decided to fix this problem also.
How do you choose which loan originators to cooperate with? How do you make sure that the loans listed on Income Marketplace are safe for investors to put money into?
We conduct a thorough legal and financial due diligence check before onboarding. As the loans placed on the marketplace also act as a security in the case of loan originator’s default, heavy focus is put on the quality of originating the loan book. We look at how profitable the origination is, the default rates of loans and analyse overall market conditions. We then add buffers to the level on which we believe investors are protected and do sanity checks to ensure that data provided to us is accurate and real. Once we are comfortable, the board of Income signs off on the listing.
All the loans listed on Income come with a Buyback Guarantee. How does the Buyback Guarantee affect the risk faced by investors?
Buyback guarantee is one method for protecting the investor against bad debt. Meaning that if the end borrower does not pay, the loan originator repurchases the loan and the investor does not have to worry about collecting it or bad debt dragging down the returns of their investment. However, as we’ve seen in the past on other marketplaces, a buyback guarantee does not protect you if the loan originator defaults and cannot buy the loans back.
To protect against loan originator default we’ve added a new security layer in the form of a cash flow buffer which protects the investor. This is something that is new to loan marketplaces and can really only be found on Income. We’ve prepared a “Security and Safety” page on our website so that investors get a better understanding of how we protect the investments and of potential risks.
If the unlikely event should occur that Income Marketplace goes out of business. What will happen to the investors’ money?
The investor funds are held separate from Income’s own funds, and in this case, the bankruptcy trustee would return the funds to the investors as the loans are paid back.
The Marketplace Lending Industry
Who do you see as your biggest competitors, and what sets Income Marketplace apart from them?
There are two different types of P2P loan marketplaces: those that provide funding for their own loan originators and those that provide funding for third-party loan originators. There are also some that provide funding to both, but my categorization really boils down to how the conflict of interest is managed. In case something goes wrong, the question is if the marketplace is truly able to act in the interest of its investors, or whether it will side with the other related party – the loan originator. Personally, I think it’s best for the investors if the marketplace is independent and is able to take independent decisions to protect investor interests. Our independence in decision making is definitely something that sets us apart from many of the existing marketplaces.
The one big difference is the cash flow buffer and investor security approach as described above. I don’t think you can currently find institutional investor level security structures on any other P2P loan marketplace except Income.
Looking at the market we see Mintos as the main competitor. They’ve been extremely successful in the past and have a dominant position, but I think there is a place in the market for an alternative such as Income.
What do you think the future of marketplace lending looks like? Which challenges do you see for the industry in the coming years?
I think the future of P2P investing is bright. We can see retail investors found investing into stocks in the past year and we can also see similar growth in alternative investment apps, so I expect P2P investing is becoming more mainstream. The reason is that retail investors don’t have many ways to invest smaller sums. Cryptocurrencies and stock markets are very volatile at the moment, while valuations of listed companies are often not justifiable by the underlying business. At the same time, investment funds offer small yields or require bigger investment amounts. Keeping money in the bank account also does not make sense from an inflation point of view. I think that offering a simple product with a good yield and added security features is really the direction where P2P needs to evolve. The unified regulation in the EU is also positive news and for sure validates P2P investing as a viable option for many investors.
As a challenge, I still see the risk of scam platforms and also retail investors losing money in marketplaces where risk management is not at a proper level. Any large marketplace failing will have a negative ripple effect on the whole industry. We do our own share in educating investors to assess risk and look after their money.
If we talk about loan marketplaces, I think it’s been almost too easy to get investments in the past years. For example, 5% skin in the game, what we see on many marketplaces, is in many cases not even close enough to mitigate actual risks. Just as an example, the industry standard advance rate for institutional investors that invest in loans could be something between 75-90%, which would translate to about 10-25% skin in the game.
At the same time, we live in a zero (or even negative) interest environment and the yields that P2P investing can produce are attractive to retail as well as smaller institutions. For those marketplaces that can find a balance between investor security and yield, this can be a really big opportunity.
The Future of Income Marketplace
What is Income Marketplace’s strategy for the coming years? Have you planned any new initiatives? Do you have a vision for the future?
Our strategy is to grow with moderate speed and introduce new asset classes as we go forward. As our big vision, Income is not just a loan marketplace in the future but a one-stop-shop for passive income and cash flow. Short term initiatives aim at launching the secondary market as well as improving the investor experience, long term plans revolve around our big vision, but they will have to wait for a while. I feel the potential is huge, and we really aim to be one of the most recognized players globally.
If we look ten years down the road and Income Marketplace no longer exists: What went wrong?
Ten years is a long time to predict, but I think the main question revolves around supply and demand – can we, on the one hand, find enough quality assets which we consider safe enough to bring to the investors, and on the other hand, do the investors find the offered yields for these assets attractive. Looking at other loan marketplaces, I believe we already have good assets on Income. I’m confident we are on the right track to grow in 2021 and provide great service and more opportunities for investors to earn passive income.