Platform risk is something mentioned here often yet rarely discussed in detail. Now we have an example of why thinking about the platform risk (the risk that the platform itself will go out of business) is something we need to think about and consider when it comes to investing on new platforms.
Thanks for the reminder, Trustbuddy, although you could have returned our fellow lenders' funds first.....
So what really happened to Trustbuddy?
Trustbuddy is (was?) a peer to peer lending platform based in Sweden that started in the high interest rate payday lending market in 2009 and was working to become a more general consumer based lender. They were the first publicly traded p2p lending platform as they listed on the NASDAQ OMX Nordic exchange as symbol TBDY (#SE0006600037) in July 2014, a few months before Lending Club listed here in the US.
The company was moving forward although the stock price was declining while they were transitioning their business (or so it seemed) and on August 19th they issued their Q2 Earnings with 21 million SEK ($2.5 million) in Revenue and 11.3 million SEK ($1.34 million) in EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) which is used as a proxy for Operating Cash Flow for the company.
New Management Installed
Then on August 17, Philip Mikal was named the new CEO of Trustbuddy. Mikal is a Silicon Valley guy and brought a bunch of techies with him. He talks about why he took the job in this very good article on AltFi. There he talks about better business and technological focus to increase efficiencies.
The other techies Mikal brought with him were announced, mostly from Klarna, a payments provider, and joined the team as of Sept 7. A great site for following this story in particular and Scandanavian investment environment in general is Nordic Investor. Along with the management restructuring, they sought capital by seeking shareholder approval for the issuing of up to 200 million additional shares and warrants.
While going over the books to see what kind of company they would be running, this new management team uncovered a 44 million SEK ($5 million) 'discrepancy' that was, according to Mikal 'probably there since the very beginning of operations.' (per Statement released by their Board of Directors)
Delisting and Bankruptcy
As more information came out on this discrepancy and lender funds (funds from those investing in loans on their platform) became frozen, the company was delisted from the OMX. The Swedish Financial Services Authority forced the company to shut down operations and a couple days later Trustbuddy filed for bankruptcy protection. Lenders were owed around $2.5 million with another $1.5-2 million in loans funded but not yet assigned to any lenders with lenders money.
How would you feel if your money was frozen like it was for these people? This is what happens when platform risk gets real.
Things To Think About When You Invest
Companies are good at hiding misconduct like this at least from plain sight. Thankfully many p2p lending platforms and marketplace lending platforms generally have transparency as one of their guiding principals, especially to lenders, and I believe the risk of this on a USD based platform to be very small. Platform risk is greater in the Bitcoin space.
Here are some things I would want to know to lessen platform risk and maybe some of these will help you.
1) How long have they been in business?
Usually longer time in business is better although that wouldn't have helped in this case. My personal rule is that I don't invest on a platform as a little retail investor (especially in the Bitcoin space) until they have been around for a year.
2) Who regulates them? Is it the securities agency or some other agency?
3) Are they in compliance with that agency?
You should be able to ask and they should be able to tell you. This is a reason why I avoid a growing BTC lending platform who I believe is clearly skirting compliance rules and I think will get hit hard for it. It's not one of the big 3 where I currently invest.
4) Is there any backup plan of servicing or banking to take over should the platform fail? Lending Club and Prosper both have this and while how effective this would be is a question, it's good for us lenders and the platforms to show they are thinking about this risk.
5) What is the lender withdrawal process like and how long does it take?
I would do a small withdrawal to see how the process works and how long it takes. Is it a PITA to do? Is it automated or does one or more than one person have to do it manually? You can bet if a platform runs into financial trouble that those people will suddenly not be available for manual withdrawals.
6) Has the company gotten outside funding/investment?
Running a tech heavy platform is expensive. Self funded bootstrapped platforms are something to admire and encourage yet a cash crunch or just plain running out of money to finish development of the applications is far more likely without sizable outside funding.
Let's hope like I believe that Trustbuddy will be seen as an exception and a reminder of something to be aware of and not something to discourage us from investing on p2p lending platforms now and in the future.