Central and Eastern Europe countries through their various regulatory frameworks, diverse levels of internet penetration, different financial market maturity and economy sizes are the perfect experimental play ground for p2p and marketplace lending. Each country represents a different experiment with different results. For example in Germany financial regulators allow video identity verification via webcam and skype. While in other countries like Slovakia p2p lenders have to have in their possession the original paper documents of any legal contract as electronic signatures are not binding.
Innovative and competitive banks in Poland have prevented p2p and marketplace lending from sprucing up. On the contrary, marketplace and p2p lenders have been very successful in the hyper internet-connected and fully-electronic economies of the Baltic countries. On the other side pure p2p lending is apparently not yet allowed in countries like Romania and Hungary where at least a consumer finance license is required and first initiatives did not succeed so far. In Germany in December 2015 the total origination for the 3rd largest platform was only 13.3 million EUR according to(www.p2p-banking.com) . We discussed with Hendrik Bremer from Zlty Melon (www.zltymelon.sk) based in Bratislava, Slovakia discussed with us the particularities of the Slovakian and Czech Republic markets.
Zlty Melon, founded in 2013, is named after the Slovak name for the yellow melon fruit. Zlty Melon has entered the Czech Republic at the beginning of 2016 and is of course using the local language name for yellow melon once again.
Zlty Melon founders, Roman Feranec and Robert Horvath came from the consulting, risk management and real estate industries. Over the past 3 years they have built the infrastructure to offer consumer loans via a pure p2p lending with an auctions system. Zlty Melon does not offer any automatic investment solution like Lending Club or Prosper do. Zlty Melon originated to date 3m EUR lent from about 1200 investors with an average yield of about 11%, average loan interest of 13 to 14% and average loans of 3,500 EUR. Their aim was as one of the 2 Slovakian p2p lenders to show that it is viable and to build a track record. Their current default rate is around 2%. The usual economic incentives also support p2p lending in Slovakia; the average consumer bank-loan rate is in the 18 to 20% range compared to the Zlty Melon 13 to 14% range while the average consumer savings-account offers only 1 to 2% interest. For comparison in Czech Republic the average bank consumer-loan is lower but still in the 14 to 16% range.
The most interesting part is that the Slovakian financial regulator does not require any regulation for consumers to lend to consumers. Therefore Zlty Melon just has to follow general consumer protection regulation. However a license would be needed if the lenders or borrowers were companies. This is very much unlike the rest of the world where the companies are perceived as more sophisticated and therefore require less oversight and protection from the regulators then consumers. One may remember that at first Prosper and Lending Club started without any regulation and were forced to register their notes with the Securities and Exchange Commission (SEC) in the US .
In Czech Republic, unlike in Slovakia, p2p lenders need a payments license. Also like other financial industries p2p benefits from license pass-porting. (In other financial markets a company with a license in a EU member country can through a very simple pass-porting fee and process operate in all EU countries under that same license).
However there is a rumor that there will not be a general EU p2p lending license available in the next 1-2 years. If the rumor is confirmed there will be 2 options : one will be able to receive a payments license or a banking license in any EU member country and then passport it in all EU countries. Such regulatory arbitration is common place. Many retail currency brokers for example have established themselves in Cyprus and used the passporting process.
Source of funds
In Sept 2015 Zlty Melon closed on their 1st series A round for a total of a little under 1mil EUR from a mix of private equity and European funds. Zlty Melon explains that receiving an investment from the European Union’ Jeremie investment program validates and provides a tremendous amount of credibility, trust and support to their young and innovative company.
Because of its double operations in Slovakia (in Euros) and in Czech Republic (in Czech Crowns) it allows lenders to lend in both currencies. This however reminds us that until the 2008 crisis a lot of mortgages in Eastern Europe were originated in Swiss Francs in order to reduce interest rates. However this lead to major currency risk taken by local consumers which lead to major defaults when the Swiss France started appreciating compared to the local currencies. This is not a common practice anymore. Lending in different currencies through a single platform is indeed innovative and can be seen as an interesting differentiation in geographies where investors are used to hold multiple currencies. On the other side experience shows that it is just a matter of time until the currencies markets take advantage of unprepared investors.
Next steps for Zlty Melon
In the future Zlty Melon intends to develop a Small and Medium Entreprise ( SME) lending product. Underwriting for SMEs in Central and Eastern Europe is even more challenging than in the UK or the US. For example much more of the paperwork is in paper format only. Also average loan size for SMEs are expected to be in the 30-200k-k EUR. In addition the financial markets and institutional funding is not as established as in the UK or the US and sourcing funds for these loans will be a challenge Zlty Melon is working on.
No money down real estate
Zlty Melon is also offering 1-2 years real-estate down-payment loans in the 20-30k EUR range. Consumers then use this capital as down payments to obtain a full mortgage to purchase a property without any money down. 1-2 years, 20-30k euro. While consumers are willing to pay higher interest rate then standard mortgage no down-payment can lead to underwriting abuse. The innovation here is however that the down payment is disbursed to the developer. And in case the consumer cannot secure the mortgage the developer will give the money back to the lender and take the property back at full price. These non colletarized but developer secured loans make one wonder : what happens if the developer goes bankrupt ?
Due to strong investor demand Zlty Melon plans to continue developing their infrastructure by launching a secondary market in Q2 of 2016. According to Zlty Melon, only fewother platforms in Central Europe offers a secondary market at this time.
Future of regulation :
The United Kingdom is an innovator and a benchmark for everything in p2p finance. Financial conduct authorities are supportive of p2p finance. The UK p2p finance association provides the perfect communication tool for the platforms and creates a credible and organized discussion with the regulators. European originators like Zlty Melon therefore suggest that the UK p2p finance association could maybe rename itself to extend to all of Europe and include in their work the continental regulators and platforms.
Author : George Popescu