Elfin Market is a p2p / credit card start-up that is currently raising money on Seedrs. I already invested in three p2p companies on the platform (OrcaMoney, Abundance Investment and Assetz Exchange) and I wanted to share here my opinion on this one. EM offers a credit line (soon in the form of a credit card) to its users and finance it via p2p loans: it is a mix between a product and a marketplace. If you want to know more, check their website, here I will share only my comments. As long as the round is open, you can invest in EM in two ways: funding their loans or buying equity; I will discuss the options in this order.
The Loan Investor Side
As a loan investor, you are funding credit lines originated by EM. The main marketing pitch by EM is that they want to offer credit card-like lines way cheaper than the competitors (more on this later): from an investor point of view, the direct consequence is that your returns will be constrained by this choice. These are the options and the forecasted returns:
As you can see, nothing exciting considering the risk of the investment. I find their approach similar to Lending Club, the key element missing here (as in LC) is their forecasted distribution of those returns: if 5.8% is their expected return when I lock my investment over 3 years, what is the volatility? In other words, if things go ‘one standard deviation wrong’, should I expect a 4% gain? 3%? I think this is a crucial piece of information for an investor.
Kuflink, to use another UK p2p platform as an example, offers returns between 6 and 7% on loans backed by real estate properties: from a pure financial point of view, EM is a sub-optimal choice, more risk for less yield.
The lending side of EM, their main mission and selling point, convince me even less. The old saying that banks lend money only to people that already have is (almost) true. Trying to solve banks lending biases, predatory lending and reduce the ‘un-banked’ is a noble and very welcomed endeavour, but this is not what EM aims to do. They are not targeting people that needs a loan to open a business or a mortgage, the maximum amount that a single person can borrow is 2k pounds! In a country where health-care is free, if you need a loan for such a small amount it can only mean that you are bad at managing your finances: you do not need to pay less interest on your debt, you have to learn how to save and spend less than you earn (and build a reserve for unplanned expenses). Do we live in a ‘fair’ world, to use EM words? No. Does this make it fairer? F**k no. On the other side, EM brags that only 7% of borrower applications are accepted: this is good from an investor point of view but it is a clear conflict with the above mission, seems that again they end up lending only to people that has no (real) need for the money.
The Equity Investor Side
As Ramit Sethi said, focus on $30,000 questions, not $3 ones. My main concern with EM is that the problem they are trying to solve is too small and therefore not relevant. The credit card business works because companies like AmEx takes advantage of bad behaviours: the solution to this problem is already here, pay all you credit card balance at the end of each month and enjoy the cashback (or whatever other other perk you credit card gives you). High interest rates on credit cards cover two cost for the card issuer: defaults and client acquisition;
Even if somehow EM managed to create a credit model that lends only to the people in need of £300 loan that also merit a very low interest rate, how can you scale such a business? Choosing to charge low interests gives less margin of error to EM credit model: if everything goes right, their growth is limited by their strict lending requirements, while if their model is wrong they risk to consume their margin really fast. Again, limited upside with unlimited downside is not where you want to be as an investor.
Client acquisition costs are typically high in the financial services sector: if you do not believe me, think about how many times you changed banking provider; if you did it more than twice in your life (depending on your age) I bet that you also know how stupid is to have debt. Here we have a product that fit a very specific client, EM operational margins low so the only way to succeed is for your acquisition campaign to target exactly your audience; maybe an Instagram campaign can do it…but it is still a maybe for me.
As you probably understood by now, I passed on this. What about you? Would you invest in Elfin Market? Please leave your comment below!
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