Why Are There So Many Estonian P2P Lending Websites?

There are at least three Estonian P2P lending companies already seeking lenders in the UK. Estonia has just 1.2 million people and yet Spain and many other large countries don't have many more P2P companies themselves.

Why are there already so many P2P lending companies in Estonia relative to its size, why are they seeking money from people in the UK and why are their interest rates very high?

We put these questions to the three companies.

Why so many from Estonia?

CEO Pärtel Tomberg of Bondora, which focuses on prime and near-prime consumer loans, believes there are many reasons why Estonia is punching above its weight.

He said that Bondora has been around for many years and so other companies have probably copied it. He explained that Estonia has a big share of financial technology and business media companies, as well as an up-and-coming start-up scene.

Technology and finance infrastructure is “significantly bigger in Estonia than anywhere else in Europe”, said Pärtel, so it's very cheap. It's also cheap to manage a company, because doing business is electronic and streamlined. 99% of transactions in Estonia are online. Even Pärtel's grandmother does it and she's over 80, he said.

Siim Maivel, founder of Investly, which focuses on business loans, shared these opinions. He said that Estonia is a small country with great technology and with exciting companies getting funding from venture capitalists.

There has been no “left-leaning governments since Estonia went independent”, which has been great for business. He believes the Estonian governments have done a good job over the long run.

Stanislav Klevtsov, business development manager at EstateGuru, a property loans P2P company, said that, in his personal opinion, Estonia is “trying to keep our leadership, as an e-country – so we like innovations and have to like them”.

Pärtel also said that traditional banks are not fun enough or trusted enough, so there are a lot of people who have been highly trained in finance, banking and mathematics, often by the Scandinavian banks, who now want to do something else.

Pärtel was referring to senior and mid-level management, which is on the young side in Estonia. They don't want to wait 30 years for the chief executive officer to retire before they can get the top job.

Stanislav said Estonia probably has “more active financially educated people as a percentage of the whole population” compared to other countries.

Pärtel said that a couple of corporate success stories has inspired entrepreneurs too. He and Siim both referred to TransferWise, which is a business well-known to 4thWay®. Although it is not a P2P lending company, it is one of a small number of companies using technology to massively reduce the costs of doing international bank transfers.

Why are they looking for lenders in the UK?

The Estonian P2P lending companies are looking to the UK and other countries in Europe for lenders and, in some cases, for borrowers too.

Pärtel said that while the lending market is sizeable even given Estonia's size, the investment and wealth management market is small, so they must seek people and businesses with cash to lend from elsewhere.

Siim explained that few lenders and foreign banks can be bothered with a country of 1.2 million. And P2P and other technology companies need to go external to make enough money.

This is not new in Estonia. The banks there are all Scandinavian, with savers and investors from Scandinavia funding lending in Estonia.

From Estonia, it's easy to scale across Europe without bureaucracy and with little leverage (meaning the businesses need to borrow little themselves), Pärtel added.

Why the high interest rates?

Interest rates range from 10% to 30% on these three P2P lending websites, significantly above the more typical 3% to 12% for UK-based competitors.

Both Siim and Pärtel talked about how little competition there is in Estonia for lending to Estonians.

Pärtel explained that just two banks control 80% of the main market. The financial crisis also had a big impact on availability of credit – and with supply of credit low it means a higher price for those who demand it.

Pärtel also compared Estonia to Finland. He said that Finland has the same wealth per person as the UK, but interest rates are twice as high because Finland is a smaller country that cannot attract enough banks to compete on interest rates.

Siim backed this up. He said that banks charge high rates. Stanislav called Estonia's Scandinavian banks “quite expensive” and said they have strict conditions.

Unsurprisingly, with high interest rates, Estonia has a culture of low debt. Siim has no credit card for example. He contrasted that with 14 cards per American. (We're not sure if he was joking, but he's probably not far off even if he was.) In Estonia, due to the high rates, you only borrow when you really need the money.

Stanislav said that foreign lenders could well be interested in the good risk-benefit ratio, including secured property loans in the case of EstateGuru. Siim said that there are great bankruptcy laws for creditors (lenders) and credit-rating technology.

A little more about the three P2P lending companies

The three companies have similar business plans to some successful UK-based P2P lending companies:

Bondora is focusing on lowering interest rates on prime and near-prime consumer loans and it intends to have the best loan rates for all loans in 2015. This is in all its loan markets, since it is not exclusively in Estonia.

More than 7,000 investors from 36 countries have funded €24 million in loans and received over €3 million in interest payments since 2009. It has more than 100,000 borrowers in four countries.

Bondora is already regulated by the UK's Financial Conduct Authority.

EstateGuru, focuses on property loans and offers short- and medium-term loans, up to five years. We could find no entry for it yet on the Financial Conduct Authority's database of registered companies and no mention of it being authorised yet, but this could be because it is very new.

Investly, Siim said, is not about under-cutting. Instead, it is focusing on dealing with the alternative business loan market that is not being served by banks. Banks struggle to risk-rate many businesses, but P2P lending companies appear to excel at it. Funding Circle, for example, has a deal with Santander in that the high-street bank refers any businesses it can't properly risk rate on to Funding Circle, which often can.

Investly is just a few days old and in “beta”, which means you can use it even though it's still testing and tweaking its initial product.

As with EstateGuru, we could find no entry for it yet on the Financial Conduct Authority's database of registered companies.

Sources: Bondora; Investly; EstateGuru

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