Turning to automation for time intensive risk assessments, this Latvian startup is creating new fintech opportunities for their country
Traditionally, getting a loan has been an all around pain in the ass. Filling out tons of paperwork for the bank application while hoping that the bank would approve you for a reasonable rate could hardly be described as a pleasant experience. If the bank declined you, there were always loan sharks because who really needs their kneecaps anyways?
Recognizing a space that was in need of some disruption, a number of startups decided to jump in with a third option. Peer-to-peer (P2P) lending marketplaces give borrowers a platform where they can receive loans from other users, getting the cash that they need at rates that are increasingly becoming more competitive with the banks.
These marketplaces have something for everyone. If you have a couple of bucks to spare and want to make some easy returns between 10 and 14%, you can find folks looking for a loan. On the flip side, the platform lets borrowers skip the hassle of the banks and make their appeal to the public. Sounds easy enough.
While the US has led the sector with companies like Lending Club catching its fair share of headlines, startups like Twino out of Latvia are fast becoming significant players, breaking out in countries like Russia, Georgia, and Poland.
Founded in 2009 by Armands Broks, the Twino Group started out originally as a balance sheet lender before making the shift to a marketplace in May 2015. Meeting with their CEO Jevgeņijs Kazaņins at their Riga headquarters, he explains how his small company based in a former Soviet republic has grown to become the third-largest P2P lender in continental Europe employing a global staff of 600.
Kazaņins tells Geektime they believe that “marketplace lending is a natural evolution for lenders.” They saw how the P2P model was successful in the US and UK, giving them hope that they too could compete for a segment of the market.
Kazaņins explains that one of the most difficult parts of the P2P loan business is not finding people to put up the capital for the transactions — most of whom come from Germany, UK, and Estonia — but the borrowers. Since they had previously operated as a balance sheet lender, they already had the necessary connections and infrastructure to generate a steady stream of folks looking for loans.
Twino hopes to attract lenders from the UK and other Western countries to their platform, offering very competitive rates of return that are not seen on other local platforms.
“The average return for consumer lending platforms in the UK is around 4-5%. In Germany and France, it is around 5-7%, while in Latvia it is approximately 10-12%.”
As with most ‘disruptive’ tech, there are risks that come with P2P lending. First and foremost is the possibility that the borrower will not pay back the loan. This is an issue that is generally pretty easy for Twino to work out using their data analytics and experience in different markets. One of their key advantages says Kazaņins is their ability to use technology to automate the risk assessment process, pumping out a decision and an appropriate rate much faster than a human-run bank would be able to.
Kazaņins agrees there are perceptions about Russia and Eastern Europe that can scare off investors. To help alleviate the concerns of investors who may have experience in Western P2P markets but are new to this region, they have instituted a number of important policies.
“We realized that there are risks like currencies,” he says, referring to changes in exchange rates between the pound or euro that the investor puts in on the one hand and the local currency in which the loan is conducted in. Therefore, Twino takes the currency risk upon themselves to lower that barrier for investment.
They also offer a buyback policy wherein if a loan defaults, they will buy it back on the 31st day, covering the principal and the interest. Kazaņins explains defaults occur at different rates across different countries, citing the fact Georgia has single digit default risks due in part to the cultural importance of paying back debt.
He says that for them, it is easier to handle the risks than for their investors. Kazaņins adds that through their models, they work the default rates into the pricing and actually perform their own debt collection.
Carving out their place in the market
Twino finds itself at an interesting competitive nexus, facing off not only against other continental European marketplace lenders, but P2P players from the UK and the banking industry as well.
On the continent, they lag behind France’s United Credit and Germany’s AuxMoney. They still have a gap to close while being able to offer higher interest rates (10-14% vs. ~6% of their competitors)
Yet, the bigger question for Twino appears to be whether or not UK-based companies like Lending Circle will be able to remain in the European market post-Brexit. The issue here is tied to bank license passporting, wherein a lender is recognized as a bank, allowing them to work in EU countries that require the official approval.
One issue that has already come up is about British lender Zopa that has applied for a European banking licence since the UK is still an EU member. As a major P2P lender, Kazaņins says that Zopa could “dominate the European market” if the move goes through. However, he says if the UK pulls out of the EU, then they will be cut off from the European lending market, which would be good news in the short run for Twino.
Taking on the banks
Evan as competition heats up among P2P lenders, their collective foe continues to be banks. Kazaņins tells Geektime that Twino continues to lag behind the rates that a borrower could find at a bank, but expects to overtake them as his company grows. “It’s a matter of scale,” noting how US lenders are already more or less on par with banks. A crucial weapon in his arsenal is their UX and overall ease of use.
“The approach of the technology companies is to basically provide better service,” adding that this is where the banks are having trouble catching up to the automation offered by fintech disruptors.
However, there remains a healthy amount of skepticism of P2P lenders among the public who generally look at banks as more trustworthy institutions.
“The only argument that the banks have left as to why they will be around in 10 years is that P2P lending is still a very young industry that hasn’t undergone tough times like the crisis of 2008,” says Kazaņins. “Essentially no one really knows how we’ll get through such a severe crisis. But if we fare well, then they will lose their last legs to stand on.”
While he clearly would rather avoid a crash, he believes that should the P2P lenders weather a storm, “[it] will be the major trigger for the whole industry and lots of capital will come in from the investor side since many are still scared to invest.”
Simply put, he says “the industry lacks a track record.”
He says another problem is their platform is not regulated. They have been pushing the government to help work on an industry that they see as being beneficial to the country. In 2016, the government started working on a draft for a law and consultations with the industry. The goal is for the Latvian Ministry of Finance to introduce it later this year.
Thoughts about Latvia as a Startup Nation
“Since we don’t have the local market, we have to think from day one about going global,” says Kazaņins, adding that “We are truly an export business for Latvia.”
Hearing Kazaņins talk about ‘going global first’ rings very familiar, echoing the mantra of Israeli startups seeking out viable markets. As a small Baltic country straddling the border between the East and West, they find themselves in an interesting position.
While not as advanced in their ecosystem as neighboring Estonia, where the Skype exit back in the day put them on the map, Latvia is gearing up to put tech front and center on their national agenda. Speaking with local startups, they tell me that you can hire very capable developers at a rate of €2,000 a month, making finding talent very affordable. Russian is still a common language here thanks to major migrations during the Soviet era, but the popular outlook feels distinctly Western.
As with the rest of the Baltics, they understand as a small country they will need to find business models that add value for users beyond their own borders. For the most part, Latvian startups’ focus again mirrors Israeli tendencies and appears centered around B2B products. In this author’s view, this is often the right way to go for smaller ecosystems that have solid talent but are unable to reach the scale of bringing on significant user rosters.
One such area where Twino sees their future is being a conduit of capital to Russia. Explaining that Russian banks have very tight controls on their liquidity, Kazaņins believes that their familiarity with that market could give them a very effective edge in making their way into the Russian lending space, despite the inherent risks.
After that, they could see markets as diverse as Spain and Kazakhstan becoming viable options for their expansion, putting the heat on their European competitors.
It is worth considering that the P2P lenders in the US survived the controversy surrounding Lending Club’s CEO, a mess that could have been the death nail for the small industry worldwide. How the sector will fare moving forward through future challenges is far from decided.