Afranga is a newly launched marketplace lending platform from the Bulgarian loan originator, Stikcredit. In this interview, we talk with Afranga COO Yonko Chuklev about the platform’s structure, business model and future plans. We also get an insight into Yonko’s view on where the industry is heading.
The Launch of Afranga
Afranga is a newly launched platform, financially backed by Stikcredit, a consumer loan provider in Bulgaria. Stikcredit already has loans listed on many marketplace lending platforms, like Mintos and Bondster. Why did you decide to launch your own marketplace lending platform?
Stikcredit as a lending company has acquired a significant amount of experience and knowledge in the crowdlending space in the past few years. We’ve been listed as a loan originator on several of the major European marketplaces and we’ve experienced first-hand the added value of p2p marketplaces for investors and lending companies.
This has sparked our interest in vertically integrating and we were looking into the idea of starting our own marketplace for quite some time. 2020 was a turbulent year, which brought the demise of some existing platforms, and others were left incapacitated. A lot of deficiencies were brought to the surface in terms of market design, poor operational procedures, lack of oversight, and due diligence. We thought things could be done significantly better and that’s what was the final push that resulted in launching the Afranga marketplace.
We believe that we can offer investors superior service and risk management, especially given the fact that Stikcredit has navigated the covid-19 crisis with excellence.
Afranga’s Ownership Structure
As mentioned above, Afranga is a trademark of Stikcredit, a loan originator. Could you elaborate on the relationship between Stikcredit and Afranga? Is Stikcredit the sole owner of Afrangа, or how is the ownership structure of Afranga?
Afranga and Stikcredit are the same legal entity. We backed the platform with the main company so the market could see the importance of the P2P lending niche for Stikcredit and to show that it has the financial firepower to scale the project. The platform leverages the existing infrastructure of Stikcredit, such as IT, HR, and accounting resources, but we view Afranga as a capsule within Stikcredit that operates autonomously.
The Management Team at Afranga
What is your own background, and how did you become interested in this industry? Who are the other management members, and what skills do you think are necessary to run a platform like Afranga?
First and foremost, running a P2P marketplace requires a team that goes the extra mile for the investors, builds trust, and most importantly – is open to understanding their needs and implementing investor-friendly features. The combination with in-depth knowledge of the P2P market, strong experience in building scalable platforms, expertise in financial services regulation and compliance, is what makes a great management team of a P2P marketplace.
Those were the “ingredients” we were looking for in order to build Afranga’s core team. Our management team consists of myself, Ivaylo Yovkov, who is our Head of Marketing; Maria Miteva, who is our Head of Customer Support; and Steliyan Stoyanov, who is our Technical Lead. Each member of our management team brings a different set of skills and experience to the table and that’s what’s making us a solid team.
My background includes working in the fields of corporate finance, legal and compliance advisory. I’ve managed to build some multi-domain expertise and work on projects in Sofia, London and New York. I’ve also been featured as an analyst in some of the leading media in Bulgaria covering economics and finance. Two of my biggest passions are finance and technology and I do like the opportunity to cover both in Afranga’s operations.
Afranga’s Business Model
Afranga focuses on consumer loans and wants to make it possible for the everyday investor to invest in consumer credit. Why did you choose to focus on this specific business model?
In the traditional P2P lending business model, the platform acts as an intermediary between the investor and the end borrower by analyzing the borrower’s risk profile and also the platform approves his loan application.
You are correct that Afranga differs from the classic P2P lending business model where the platform is responsible for many functions such as credit scoring, granting loans, debt collection, etc. Instead, Afranga focuses only on providing a technical solution for lending companies and investors, and it acts as an intermediary solely between those two groups. By narrowing the scope of activities which the company has to perform we are able to focus on core functions and we are able to provide more value to our investors over time.
Since we don’t do the lending ourselves, we can attract a variety of loan originators which focus on different asset classes, such as personal loans, mortgage loans, auto loans, etc. Over time this will provide our investors with a significant amount of benefits as they will be able to diversify their investment portfolio quickly and efficiently across loan asset classes, companies, geographical regions, yields, etc.
We leave the origination and debt collection to companies who have developed a significant amount of expertise and in-depth knowledge in their field, and as such we are improving the returns to investors. By not having to find the borrowers ourselves, we can focus our resources on building a strong investor community which improves the liquidity of the marketplace and makes it more attractive for established lending companies. This is how the adopted business model unlocks our ability to do what we do best.
Investing on the Afranga Marketplace
Could you briefly explain what type of investment products you offer at Afranga? How does it work?
Afranga enables every investor to purchase two types of loans – instalment loans and short-term loans. Afranga offers the opportunity to easily build a diversified loan portfolio with a few clicks. Investors who want more control can invest the desired amount manually by selecting each loan individually using our advanced filtering options. Alternatively, investors who want a higher level of automation can use our auto invest feature. The auto invest allows each investor to build a custom loan portfolio based on a set of criteria. Our algorithm will automatically purchase only loans that meet the investor’s criteria. The system will stop when it reaches a maximum portfolio size set by the investors and it will reinvest funds automatically whenever there is repayment. This system allows our investors to sit back and watch their portfolios grow.
If I decide to place money at Afranga and build a diversified portfolio, how much can I expect in net yearly return after losses and delayed payments?
Currently loans on Afranga are offered with a return of 16.8% per year. We expect that this return will be maintained for the foreseeable future. Investors receive interest on their principal even if a loan is overdue, which means they receive income for every single day their money is not in their wallet. What is even more beneficial for investors is that all loans come with a 60-day buyback guarantee – if a loan becomes overdue by more than 60 days, Stikcredit rebuys it from the investor and returns to the investor the initial principal plus accrued interest. This way the investors actually receive a real return of 16.8% per year.
How do you calculate your returns? What method do you use to decide when a loan must be written off and accounted as lost or with minimal chance of recovery? Do you use an objective or subjective way of deciding when to write off loans in the actual returns?
Stikcredit follows the International Financial Reporting Standards which set a strict framework for when a loan can be written off. We’ve prepared our internal accounting policies in compliance with the IFRS and based on the historical performance of our loan portfolio we use quantitative methods to calculate the loan loss allowance for each bucket. At the moment Stikcredit writes off a loan entirely if it has reached an overdue of 360 days.
How Afranga Handles Risk
How do you make sure that the loans listed on Afranga are safe for investors to put money into?
Our team has developed an extensive risk-management framework based on our experience in the P2P industry over the past years. This includes our checklist of internal controls, compliance guidelines, as well as our loan originator due diligence policy. The framework which we’ve developed for onboarding lending companies steps on the knowledge that Stikcredit has acquired as a loan originator on other marketplaces and the deficiencies spotted. The analytical framework is a blend of financial health checks, portfolio quality and performance, operational efficiency, local market condition changes and reputational and AML assessments as well as ongoing analysis of the performance. Also, our framework is periodically being reviewed for effectiveness. We are always ready to address any deficiencies and implement the newest industry practices and standards.
In addition to our framework, every transaction concluded on Afranga is backed not only by a set of legally binding assignment agreements with the investors containing a buyback obligation, but also by a detailed obligation of every loan originator offering loans on Afranga towards the platform to have skin in the game of each loan they offer on our platform and conduct reporting on a periodical basis. The skin in the game and buyback guarantee obligations make sure that the lending companies are acting in the investors’ best interest.
A buyback guarantee protects all loans on Afranga. How does the buyback guarantee work, and how does it affect the risk faced by investors?
What this means is that if a particular loan in which you’ve invested becomes delayed by more than 60 days, the loan originating company will repurchase the loan from you. You will receive back your initial investment plus any accrued interest. The buyback obligation is what takes away the default risk of the borrower from the investor and transfers it to the loan originating company.
If the unlikely event should occur that Afranga goes out of business. What will happen to the investors’ money?
Investors will have access to their full information regarding the transactions which they have executed on the platform and an appointed liquidator or administrator will be responsible for managing the investment repayments.
Most platforms have seen a large negative impact due to the Covid-19 pandemic. How has the pandemic affected the launch of Afranga?
Afranga was not live yet, but Stikcredit navigated through the unexpected Covid-19 situation with precision and focus, and we have proven our resilience and ability to respond to crises. We have been able to maintain a healthy profit margin. This approach provided us with the financial and operational capacity to focus on Afranga. If anything, the Covid-19 pandemic was a catalyst for launching Afranga, because we saw how everything could be done so much better, and we seized the opportunity.
Who do you see as your biggest competitors, and what sets Afranga apart from them?
We have bold plans to grow Afranga into becoming one of the leading European P2P marketplaces by adding a number of selected loan originating companies and developing a diversified portfolio of loan products. I would say we consider as competition large established platforms operating in the personal loan asset class with assets under management of EUR 50+ million.
We are shaping our competitive advantages around the platform’s intuitive design, our dedicated development team, lean customer service, willingness to quickly incorporate investor feedback as well as our strong track record on other P2P platforms over the past three years.
One of our investors wrote “Afranga implements P2P marketplace features, which have normally taken years in just a couple of months”. Another one wrote, “Your platform is the fastest of all I invest on”. This is how we want to position ourselves – implement innovations and provide quality support to every Afranga investor.
What do you think the future of marketplace lending will look like? Which challenges do you see for the industry in the coming years?
The P2P industry is fast-moving, competitive and gaining popularity among millennial retail investors. Because of its rapid growth, P2P lending will evolve more and more into a separate asset class for the retail investor. Another aspect of its popularity is P2P lending’s ability to fill market gaps in the finance world. We expect that the industry will fill more market gaps such as access to business loans, student loans, loans backed by real estate and even heavy machinery.
At the same time, the P2P platform of the future will benefit from improved transparency with the implementation of smart contracts, distributed transaction ledgers and more. This being said, the challenges for the industry will be managing the balance between growth and sustainability, an evolving regulatory landscape as well as possibly competing with other financial instruments in a non-zero interest rate environment in the future.
The future of Afranga
What is Afranga’s strategy for the coming years? As a relatively new platform, how do you plan to position yourself in the market?
Our goal is to first and foremost build a strong investment community by establishing a strong relationship with retail investors based on trust and transparency. We want our investors to know that they can rely on us and that we will always listen to their feedback, implement it rapidly and build new functionalities as the need for them arises. We are currently focused on growth and we are working on expanding the diversity of products offered on the marketplace.
If we look ten years down the road and Afranga no longer exists: What went wrong?
In my view most businesses which fail within 10 years have one major thing in common – they failed to bring the customer’s perspective into their products or services. As a platform in the P2P lending space, our main focus is understanding the needs of our customers, establishing strong relationships with them and providing a user experience in line with these needs. In case we do not exist in 10 years, my best guess is we stopped doing so.