Why pausing Loan Originator was the best decision for everyone
A few months ago, we launched Loan Originator to connect you with multiple P2P lending markets across the world. Then, shortly afterwards, we paused it.
This was disappointing for everyone – you, us, and especially our partners who we’d worked very hard to integrate into the platform.
Such decisions are never taken lightly and I’d like to explain why suspending LO was the right decision for everyone in the long term.
A storm is coming
The world is fighting its toughest foe in almost a century. World Bank forecasts the global economy will shrink 5.2% this year as a result of COVID-19 and the lockdown measures to contain it. This, World Bank says, will be “the worst recession since World War II.”
Banks are already stockpiling funds to cover losses. As government assistance programs expire, banks expect loan defaults to rise. Citigroup, Wells Fargo, and JPMorgan Chase have each put aside billions of dollars to soften the blow to their bottom lines.
The pandemic is killing jobs, too. The International Labor Organization predicts almost half of the global workforce – over 1.6 billion people – “stand in immediate danger of having their livelihoods destroyed”. Millions of people are on reduced hours or pay just to stay employed.
Despite their decentralized nature, P2P lending markets will not escape unscathed. With rising unemployment, lower salaries, and less government assistance, the demand for loans will rise. So, too, however, will the risk of default, and unless there’s liquid collateral backing the loans, investors funds and lenders’ reputations are on the line.
What this means for Loan Originator
Loan Originator is a multi-market P2P lending marketplace. Investors invest in loans pre-funded by loan originators and receive interest and repayments in return. Under normal economic conditions, this is a pragmatic and efficient business model. Throw in a global recession, however, and it’s a house of cards.
Loan Originator only works when we can fulfil our promise to investors. This depends on the successful return of investor profits and application of risk management measures, such as the loan originator’s buy-back guarantee. However, not all LO investments are backed by collateral, and not all such collateral is liquid. Investors then rely on the loan originator to return their money.
In a recession, it might be difficult for a loan originator – even one with a high MyConstant Rating – to honor the buy-back guarantee. If this happens, their reputation and MyConstant Rating suffers. In the end, the product fails and everyone loses.
The triumph of long-term thinking
Our decision to pause Loan Originator is a triumph of long term thinking over short term gains.
We’re thinking about you, our investors, as well as the reputation of our partners. We’d much rather postpone LO while the economy recovers than push ahead and risk everything. Even if it means temporarily pausing our expansion into new markets.
We understand this will have frustrated those who were looking forward to experimenting with new loans. It’s especially challenging for our partners, who’ve spent six months getting to know us and integrating their systems with ours. But all is not lost. We’re keeping a close eye on the market and when things improve, we’ll resume Loan Originator in a much better place than many other platforms who might’ve taken a beating in the coming storm.
Until then, thank you for your patience.
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