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Are low rates on crowdfunding loans real?

Pay attention to this analysis.

This article was translated from our Spanish edition. Opinions expressed by Entrepreneur contributors are their own.

Annie Spratt vía Unsplash

If you are like me, you don't like to take someone else's idea and assume it's true without first validating it. You like to analyze the why of things. With this analysis and validation strategy you can deny many news that end up being false, learn new things or even generate your own ideas as a result of your research.

One of the principles that I always like to analyze is the business models of the different companies. That is, if they offer you something “free”, what is behind it? Are they using the hook that it's free to sell you something else? Are they trying to get you to try their product and then charge you? Are they selling marketing and need the traffic that people like you generate for them? With this in mind, I write this column, but not before warning you that in order to fully explain the premise of this article I have to include some technical explanations.

I've always wondered what the people at Prestadero (the credit crowdfunding company I run) think when we offer them much cheaper credit rates than the competition. Do you think it is fraud? Do you think it is too good to be true? Maybe they think there is a "cat locked up"? Honestly, if I hadn't founded Prestadero and they offer me such low rates, I would think the same too, or at least try to find out its feasibility. How come they can offer such cheap rates? And it is that since we began operations in 2012, we offer personal loans of up to 300 thousand Mexican pesos with rates that start at 8.9% per year, without guarantees and without guarantees.

As entrepreneurs, when we think about launching a product or service, we always have to think about the differentiator vs the competition. What is your value offering and why is it better than the competition? When I started Prestadero (2011), I noticed that the vast majority of rates on personal loans, payroll and credit cards were exorbitantly high, so I set out to identify how to reduce them, granting fair loans, and maintaining the sustainability of the business. To be clear, I am not doing it for altruism; altruism is not sustainable, and therefore cannot change the world. A sustainable business model, which allows the company to win and its users to perceive a different offer, this can change the world. Through crowdfunding I found the solution and here I explained why.

When I thought of founding prestadero.com, I thought of traditional finance companies; that is to say, the Sofomes, which borrow to in turn lend. I quickly noticed a problem. The Sofomes themselves receive relatively expensive loans, which sets a floor for their own loan rates. Suppose, for example, that a Sofom receives a loan (to in turn lend) of 13% per year in pesos. Sofom itself has, necessarily, to lend above this rate. Furthermore, you cannot simply lend at 14%, because only 1% more would not cover your operating expenses, acquisition costs, past due portfolio, asynchrony between the time they lent you and they dispersed credits, among other factors, before the commitment acquired in its liabilities at a rate of 13% per year.

This forces Sofomes to lend well above this 13%; Let's say 50% per year (and I'm going low, because there are Sofomes that lend at rates well above this). So, if you want to launch a loan company that lends below 20% per year, a Sofom is not viable - or so I thought.

Another option is the entities that can "capture", such as banks or Sofipos. These institutions do not ask for credit to lend, but are allowed to lend part of the funds they collect (from their own balance sheet). For example, if you have an account at ABC bank, that bank takes part of those funds and lends them to other people in the form of credit cards, mortgage loans, personal loans, etc. Nowadays, very few banks pay the saver any fee for using their money to lend (and you also don't even know about it), therefore, the bank can take a large part of the return on the interest it obtains from its loans financed with your money of saver.

The greater the difference between active rates (the high rates at which they lend), and passive rates (the low or zero rates they pay you for having your money saved in their accounts), the greater the bank's utility. So, banks have a direct interest in attracting cheap and lending expensive, since their utility depends on that.

If today you notice a bank offering attractive rates it is an attempt at competition (which I consider should be the way in which an efficient market is regulated); Unfortunately, the big banks in Mexico are counted on the fingers of one hand, so this "competition" lacks a lot of development.

In addition, traditional banks have historically bet on the acquisition of clients through a very expensive infrastructure, such as thousands of brick branches located throughout Mexico. This difference between active and passive rates should not only cover the credit risk, but also the maintenance of this expensive infrastructure, which translates into high credit rates for its clients.

In contrast, Sofipos, in general, do not have such an expensive infrastructure; and therefore, they have to attract their investors with more "attractive" returns. These yields work in a similar way to the floors that Sofomes establish with their creditors when requesting credit to lend. For example, a Sofipo, to attract customers, can offer you returns of 10% per year (without a doubt, a good return considering the current reference rate). And most likely, no bank will offer you this rate because they simply do not need it (they can capture it cheaper). But when a Sofipo offers 10% to its savers to obtain more clients, it implies that it has a hard credit floor of at least 10%, and that most likely due to the inherent costs of its operation and the overdue portfolio, it will be closer to 50 % in the rate of credits that we talked about previously.

It is true that banks and Sofipos have insurance for savers that crowdfunding does not have, mainly because they decide to whom to lend and how (400 thousand UDIS in the case of banks, and 25 thousand UDIS in the case of Sofipos, I allow myself to round up 2.5 million pesos in banks and 160 thousand pesos in Sofipos), but outside of those amounts nothing is guaranteed (as we could see with some savers with the Ficrea case).

When you invest in a Sofipo, for example, you are subject to their risk models, and if they lend everywhere without any quality control, you will most likely find out too late if they are losing money and you are at risk of losing part. of your funds. It is true that Sofipos as regulated entities have to report their Financial Statements to the CNBV (National Banking and Securities Commission) and that they are public, and that, analyzing them, you could find out if they are troubled. Obviously, it is not in their interest to lend "without quality control" either, because they themselves would lose money. The problem is that, whatever the interest of a Sofipo, you do not have the knowledge or detail of their loan portfolio "behind the scenes" and they do not have the obligation to report it in great detail.

This is where the crowdfunding business model comes in. Under this model, savers lend directly to applicants, taking 100% of the interest rate. It is common to think that then we do not have an adequate risk analysis because we do not lend our own funds, but at least in the case of Prestadero, it is the opposite. Even Prestadero participates with a portion of all the credits that it authorizes to align interests with its investors, and historically it has only authorized 6% of the requests it receives. This means that the applications we do approve have historically low rates. In addition, our absolute transparency requires us to demonstrate results to investors.

Why, then, can we offer such low rates? Let's summarize. As the relationship is direct (unlike any traditional financial), the distribution of returns is more equitable and the platform only takes a commission. The Collective Financing Institutions ( regulated crowdfundings ) 1) we do not have an expensive infrastructure and thousands of branches that we must maintain and charge our clients through the increase in credit costs, 2) we do not have the predisposition to raise the rates of our credits ( since we are commission agents and we do not earn more, or less, due to the spread of rates), and 3) we do not have a hard floor from which we must lend (as Sofomes have when they ask for loans to loan or Sofipos when they offer yields to your savers). This is how we can offer credits with historically low rates, and with this we seek to generate that disruption that the country needs to have fair credit options.

A few years ago, Uber modified the taxi business model with a “Marketplace” model; Airbnb the hosting model, also as “Marketplace”; Mercado Libre and Amazon the model of commerce under the same concept. Isn't it time that the “Marketplace” model that is drawn with financial crowdfunding is the next industry to turn upside down? Maybe it's too early in the evolution of finance in Mexico, or maybe you trust your bank too much to try something new. But isn't it worth trying? I have already detailed why the credit rates obtained from crowdfunding are real, but it is a matter of you checking it. Oh, by the way, 40% of the loans that are granted today in Prestadero of the more than $ 8 billion pesos in applications, are from existing clients. We must be doing something right.