Debitum Network Review 2020 – Investing in a Decentralized P2P Lending Platform

I’ve written quite a bit about P2P investing on this blog, including a long article about my favorite European P2P investment platforms. What I haven’t written about before, however, are platforms powered by the blockchain. That is precisely what I will be talking about today, as we discuss Debitum Network.

Debitum Network is an alternative investment platform where both retail and institutional investors can invest in loans for small businesses. Such a business model has important advantages that set it apart from other crowdfunding platforms. One of the key factors is: it has low risk, yet attractive annual returns. 

I’ve spoken about the reasons for the existence of P2P lending platforms, but it’s worth summarising them again here. Approximately 70% of all micro and small to medium-sized businesses in emerging markets lack access to credit. This can be due to many factors, from over-regulation to an underdeveloped banking environment in their country. We thus end up with an estimated $2 trillion credit gap for SMEs worldwide. This market is therefore ripe for innovation, as we have already seen in recent years through the success of Mintos, Peerberry and other platforms.

Debitum is a completely decentralized platform where investors can invest their money and small businesses can correspondingly apply for loans.

While the returns were originally projected to be around 10-15%, in line with other traditional P2P loan platforms that I’ve mentioned in other articles, the platform seems to have moderated its expectations in the past few months, now advertising around 8% returns. This makes more sense given that we are dealing with business loans here and not consumer loans.

In the screenshot below, showing the previous version of the homepage, you will see the 10-15% rates being advertised.

Debitum had a crowd sale to get its initial funding, which came in the form of an ICO where they raised more than $18 million, a whopping sum.

As of 2020 it has grown quite a bit and is now competing with the top P2P platforms in Europe.

With Debitum, you can not only invest fiat money, but you can also invest (and also withdraw) in crypto. This is very interesting for those who have a lot of assets tied up in crypto and for some reason or another are reluctant to switch these assets into fiat money. It would be much better to put those crypto assets to good use and see them grow by investing in a platform like Debitum Network. The crypto market, in general, has gotten hammered in 2018 and hasn’t grown much in 2019, so investors in crypto would be very happy to get some returns in the form of interest from loans.

Let’s learn about the DEB token according to Debitum:

Debitum Network is designed to unite borrowers and those who help them apply: investors (lenders), risk assessors, document validators, insurers, etc. Companies or individual professionals who work in the alternative finance space can connect-in to the network for free and immediately begin facilitating cross-border deals. All actions are processed through the Ethereum Blockchain, making Debitum Network a secure and incorruptible infrastructure. It’s made up of an Ethereum-based family of smart contracts, facilitated by one internal means of payment.

Transactions run through Fiat currencies, ensuring businesses can actually use the service easily in their locality, and from day one. Based on DEB token usage within its lifetime for each loan, the total needed to buy DEB tokens will surpass the total ability to sell DEB tokens, thus creating upward pressure on DEB token price. This is the reason why there was such a frenzy for buying into the Debitum Network ICO, as investors were eager to grab DEB tokens hoping for a future rise in their price.

DEB tokens are already available for trading on the KuCoin and Lykke exchanges, with more exchanges joining in the near future.

If you’re the type who likes to read whitepapers, you can find the Debitum Network whitepaper here. I found it very interesting to go through the white paper as it explains how Debitum is attempting to address certain issues with P2P lending by using blockchain technology (Ethereum to be specific). While it was an interesting read, like many other ICOs, the DEB token has completely lost its value since launch, so for those who invested in it, it wasn’t such a great investment after all.

On the other hand, the ICO provided Debitum with a ton of cash which should help them accelerate their growth and hire the best developers and staff to build a solid platform.

The Debitum Network team comes from the innovative technology company DEBIFO, a successful traditional invoice financing business in Europe, which is Mintos’s partner. Debifo finances invoices for Mintos, one of my favorite P2P loan platforms.

Debitum publishes a very interesting blog, which deals with topics that are of relevance to any investor. They’ve written about topics like:

• Types of interest rates
• What makes an investment safer
• Types of investing

I personally enjoyed going through the articles on their blog and saved many of them to my Pocket account for reading later during breakfast or commutes. I value such platforms not only for the monetary returns they give to investors, but also for the learning opportunities they provide.

By investing, say, a thousand euro onto a platform like Debitum, you now have a stake and are naturally inclined to keep reading about the goings-on of the platform and also informational articles like those found on their blog. By being invested, I find that I learn much more than if I just grabbed an investment book and read that. There is something about having a stake in something that makes learning more sticky.

Signing Up to Debitum Network

Signing up is easy and can be done in two minutes provided you have a photo of your face, plus an ID or passport handy. Once you fill in your details and address, you will be asked to upload a copy of your passport or ID as well as your photo, and once these are submitted you will have to wait for Debitum to approve your account.

With your account approved, you can then proceed to deposit money and start investing, including using the excellent auto-invest tool Debitum provides.

Low Risk and Attractive Returns

How does the platform manage to maintain low risk and still offer attractive returns for investors? It depends on the business model chosen, the risk assessment process, a careful selection of partners, as well as the quality of loans that they offer.

Since the launch of the platform in 2018, in September, Debitum Network held an active discussion with around 50 non-bank lending companies providing loans to small and medium-sized businesses. They have decided to cooperate with only a few companies whose lending portfolio meets the low-risk criterion and at the same time has an attractive return.

Through the period since the launch, there have been around 1.5% of late loans (late by more than 90 days) and all of them were bought back by the loan originators (all loans have a BuyBack guarantee).

Selection of partners and Due Diligence process

Before signing a contract with a potential lending institution Debitum Network carries out a thorough due diligence process which sometimes takes around 6 months (in the case of “Cardec Factoring”). After having gone through various checks, a lender is eventually onboarded on the Debitum Network. There are some specific Due Diligence process steps that any investment platform has to take before it starts uploading any loans for investment. If these are ignored, eventually bad loans will aggregate, which may cause a platform to go broke sooner or later. Debitum Network agreed to share a few things that a thorough Due Diligence should look like. 

It all starts with an initial screening. Most lenders will be dropped at this stage as their business model might be too risky, or they might have overexposure to certain types of loans or businesses that are seasonal in nature, etc. If it is determined that it is possible to work together, the platform makes an offer and sends out questions from their due diligence questionnaire, which helps it to gather the information it needs: financial reports, loan logs, contracts, etc. If the information collected is sufficient, then the platform checks the company’s financial strength, loan delays, regularities of payments, the profitability of operations and cash flow. 

If companies do not provide this information, they will be rejected as potential partners. Upon receipt of the data, additional questions are sent regarding bad loan redemption opportunities, specific customers, certain payments or processes. Only then is the contract negotiated. If the loan originator is vague with answers to specific questions, those are asked again. If they fail to answer the second time, the loan originator is crossed out as a potential partner. If Debitum Network is happy with the answers, the contract is negotiated and the management, as well as the risk assessment team, visit the lender’s physical workplace, talk to staff, executives, find out how they work, and more. Finally, they sign the contract. At each quarter, Debitum Network repeats the essential steps above to check how the lender’s financial situation has changed during that period.

As Safe as Government Bonds in the Netherlands, But Having Returns of Up to 8%

The newest partner of the Debitum Network is a good example of how it is possible to align safety with attractive returns. The platform has recently onboarded an invoice factoring company “Cardec Factoring” from the Netherlands. Why are their assets some of the safest investment options available in the market today and still have excellent interest rates? This is how it works.

Every year the Dutch government allocates around €400 million to aid citizens who cannot afford to pay for legal services. The government has established a special institution for this: “Raad voor Rechtsbijstand” RvR (Legal Aid Board). Lawyers apply for the possibility to deal with those legal cases and if approved by the RvR, get promissory notes from the institution (that are paid for when the cases close). 

Since cases may last for over a year, lawyers want to get paid faster. This is where “Cardec Factoring” steps in. They buy the promissory notes from the lawyers paying 85% of the amount of the invoice upfront (the rest is to be paid when the case closes) for a daily interest of 0.05%. The average duration of a case is around 80 days. When the cases close “Cardec Factoring” gets paid on the promissory notes by the RvR. In order to get the money faster, “Cardec Factoring” refinance the promissory notes on the Debitum Network platform for 7% – 8% annual interest rates. The assets of “Cardec Factoring” are funded really fast. No wonder, since they are backed by the government of the Netherlands.

These types of assets involve a certain level of safety that can be compared to investing in Dutch government bonds. On the other hand, returns of 7% – 8% for such safe assets are some of the best investment options you can find. Compare it to returns on the bonds of the Netherlands are in the negative territory. All Bond Yields from 1 year to 15 years have negative interest rates. Which means you will have to pay them for buying and holding their bonds. With 20 and 25 Year Bond Yields standing at 0.20% returns, you can only guess which investment is better. In terms of safety, according to Debitum, they are in essence the same.

How Debitum Network Manages Risk

One of the key elements for risk management with Debitum Network is independent risk assessment parties. They have always outsourced risk assessment to independent professionals who know the local markets and their players well and can provide a precise and adequate risk score for each company that borrows.

They did an excellent job in identifying issues in Aforti Finance loan book. Last year, Debitum Network removed Aforti from its platform. Debitum Network bought back the entire amount invested plus interest from Aforti assets and returned it to its investors.Aforti has caused quite a debacle on several platforms including Viventor and Mintos. Debitum was the most proactive platform out there in this case.

Let’s see how this went down. After speaking with the Debitum team, here’s what I discovered.

While doing the 1st and 2nd quarter follow-up due diligence process, Debitum Network’s risk assessment team noticed some discrepancies in the financial data provided by Aforti. Specifically, they found a mismatch in Aforti’s loan book, profit, and balance sheets. A lot of important questions were asked during correspondence between the two teams, but the answers from Aforti were too vague.

After a month of correspondence, Debitum Network decided that it was in the best interest of its investors to remove the assets from the platform. Therefore, all investors got back their investments and returns.

Within a month a few other P2P platforms started experiencing issues with the same loan originator. These issues come up time and time again, and some platforms are learning that it is better to be proactive and do due diligence before they onboard a loan originator than to be reactive and face major financial issues with a possibility that things start spinning out of control and a loan originator becomes insolvent. If that were the case, they wouldn’t be able to honor their buyback guarantee. 

This makes Debitum Network unique as we they are probably the only company that uses independent parties for risk scoring of assets on our platform. This is a great advantage as independent risk scoring increases transparency, shows a real risk of investing in a specific asset, and helps to protect investors’ funds.

And that’s one of my top reasons why I like this platform.

Debitum Network always looks ahead and tries to avoid the risks before they arise or worse, get out of control. Having a very strong risk management team and a thorough due diligence process should help investors stay calm with their investments and security of funds. In turn, this will ensure that Debitum Network can continue to grow as a platform and have its good reputation spread around new investors.

What happens to platforms that neglect risk assessment and due diligence processes?

In the last month, there has been considerable turmoil in the crowdfunding market with P2P platform “Kuetzal” having issued “fake loans”, offering around 20% annual returns. The company even had a clause in the contract that it would not commit to a due diligence process with lenders.

What are the consequences? The bank has frozen the company’s account due to possible criminal financial activity, the company’s reputation has collapsed, and it is difficult to say how much money investors will lose once everything is cleared up.

Kuetzal has announced that it will cease operations. Thus, high-interest rates and a superficial approach to risk assessment ultimately turns against investors seeking a high return on their investment. A few other companies (Envestio for example) are under scrutiny and may suffer the same consequences. 

Quantity or Quality?

When comparing Debitum Network with other crowdfunding platforms, some may find that Debitum Network offers a fewer number of loans and low-interest rates. However, the model chosen by the platform automatically rejects many loans that are too risky. A large spectrum of loans from a variety of lenders can be both good and bad. However, more does not mean better, and this is the hard truth that a lot of platforms learn when a loan originator goes bankrupt and is not able to fulfill their obligations to pay the principal and the interest. 

Specializing in business loans and proper risk assessment narrows down the quantity but enhances the quality of the investment portfolio. Lower interest rates on business loans than on consumer loans certainly does not mean that investors will get lower returns in the long run. All lenders face bad loans and the higher the interest rate on the borrowers, the more likely it is that the borrower will default. 

Remember that there are no fees for investing on Debitum Network. Maturity times vary from 2 weeks to 18 months. There are various assets to choose from, such as factoring, business loans, property and stock.

Go ahead and give it a try, and let me know how it goes.

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