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TORCH Report: Mintos
06/08/2019

TORCH Report: Mintos

How transparent is Mintos, how likely is it to collapse, and are they doing everything possible to protect investors?

Welcome to my first TORCH evaluation. Those not familiar with project TORCH are welcome to read this intro first.

To maintain the integrity of a surprise inspection, this report was not sent to Mintos prior to publishing. However, Mintos is welcome to post a reply or send me an official comment. Readers are also invited to comment on the criteria and findings. The post will be updated over time.


Table of Contents


Legend

Pass

Pass with remarks – there is room for improvement

Fail – needs to be amended

Info

Bonus

All screenshots were taken on the reviewed platform, unless otherwise stated. Red notes and markings have been added by me. Click to enlarge any screenshot.


Transparency & Honesty: Platform

Identity

Legal entity and actual office address are listed in the website footer.

Key people

Entire team is listed in About Us: names, roles, faces, and some LinkedIn profiles.
I recommend separating the team into groups to make it easier to find the people responsible for key functions (CEO, CFO etc.).
Mintos does not have a supervisory board.

Track record

Foundation year, funded loan amount, repaid principal and interest, current portfolio size, and number of registered investors, are listed in the Statistics page. However, some of the data is displayed in a misleading manner:

– The number of “registered investors” likely includes non-active users. The only relevant figure is the number of investors with an active portfolio.

– Mintos chooses to highlight their flattering cumulative investment volumes, rather than highlighting the monthly funded amount and current outstanding portfolio, which give a more accurate image of the platform’s growth curve and current status.

Updated 21/8/19 – new recommendation:
– I recommend adding the historic monthly portfolio size to the chart. This is probably the best representation of growth and current status.

Financials

Audited annual reports are published under Investor Relations.

Ownership

Partially disclosed in the 2018 Annual Report (pdf): “The Company is ultimately controlled by AS Grumpy Investments […] the Company has done transactions with entities within Mintos Group (i.e. with parent company of Mintos – AS Mintos Holdings and other entities owned by AS Mintos Holdings) as well as other related companies […] Some of the Company’s clients – loan originators, to whom the Company provides services have been related parties for whole or part of the reporting period[…]”


However, neither the report nor the Mintos website offer a comprehensive list of related parties, and of the individual shareholders and beneficiaries of the parent companies. Some loan originators are disclosed on the platform as having shared equity investors with Mintos, but the implications of this are not explained.

A Google search for “Grumpy Investments” (previously “Skillion Ventures”) reveals very little about the company other than its investment in Mintos. The company is owned by Aigars Kesenfelds, who is listed on LinkedIn as one of Mintos’s co-founders, but whose name does not appear anywhere on the platform. Mr Kesenfelds is also an official co-founder of lenders Mogo and 4finance, and the true beneficiary of many other businesses, some of which are related to Mintos.


This whole topic is lacking in transparency. Ideally, Mintos should add a page called “Ownership”, “Network” or similar, with flowcharts detailing its holding structure and network of related parties, as well as an honest explanation about the implications of those relationships for investors (see Operations & Risk: Platform).


Transparency & Honesty: Originators

Identity

The legal entity and foundation year of each loan originator are published on the Loan Originators section.

Track record

The accumulated loan volume and current portfolio size of each originator can be found on the Loan Originators section. Strangely, Mintos does not update these numbers dynamically, despite claiming to have access to originators’ full loan books. Instead, the numbers are based on the latest annual report, which may be 19-month old (see “Financials”). The date of last update is also confusing, in this example showing 15.7.19 although some of the stats are based on figures from 31.12.17.

This actually puts originators in a worse light than they deserve, as the key figures grow with time. Still, for the sake of clarity and usability, I would expect Mintos to update these figures dynamically, or at least show the date to which each number actually refers.

Loans outside the platform

Except for the accumulated and current size of each originator’s total loan portfolio, Mintos does not provide information about originators’ loans that are not listed on the platform. Those loans affect originators’ financials, and by proxy, affect Mintos investors – even before their impact is reflected in the annual statements.

This lack of transparency is even more evident when it comes to loans previously issued on Mintos, which were bought back by the originator. Investors have no way of knowing what happens to those loans next. At least, I feel that Mintos should provide up-to-date data about the countries where each originator operates, their default rates and recovery rates (for the entire portfolio).

Financials

Annual statements are provided by each loan originator and published on their originator page. Some of these statements are recent and of high quality, but many are:
– Outdated
– Unaudited
– Minimal
(showing financials, but no data about the loan portfolio)
Not in English (unusable to most investors, especially when uploaded as a scan which cannot be translated electronically)

I can accept that very small originators can’t afford extensive reports and expensive audits. But larger companies have no excuse for such low quality of reporting.

I believe that Mintos has the responsibility and the resources to create a uniform and accessible display of each originator’s key financial figures: accumulated and monthly issued loan volume (on Mintos and in total); monthly portfolio size (in total); monthly ratio of late and default loans (on Mintos and in total) and recovery rates; annual income and profit, assets and liabilities. This data is best displayed on graphs to reflects the monthly, quarterly or annual change.

Basic loan info

Loan country, issuing date, and basic information about the borrower, are displayed within each loan page. Enough to feel that the loans are real (but not necessarily enough to prove it – see Contingencies).


Transparency & Honesty: Performance

Full loan book status

Displayed on the Statistics page in a somewhat misleading manner:

– Prior to the first payment date, loans should not be listed as “current”. Those loans have not yet had a chance to run late, and thus skew the data to always show higher rates of “current” loans, which users interpret as “repaid on time”. I recommend separating those loans into another column called “Recently issued”.

– No insight is provided on finished loans, which often serve as a better indicator of performance.

Both concerns are especially true for short-term (single-payment) loans, whose performance can only be evaluated once they are repaid. To improve transparency, honesty and usability, I recommend replacing the loan status table with the following charts:

(Original design, mock figures. Free to use)

Updated 17/8/19 – New criterion:

Specific loan status

The status of each loan is displayed in the Secondary Market, but not in My Investments, and not on the Primary market. There you must click a loan to see its status, or use the filters on the side panel. This makes it very easy to mistakenly invest in loans that are already late.

Full loan book returns

Mintos chooses to advertise the flattering figure of historic average interest rate instead of the more significant historic return (after delays and defaults). To make matters worse, they sometimes misrepresent the interest rate as “net return” – a downright lie.

Update 25/8/19: This month, Mintos has totally redesigned its landing page, including the place that said “average net annual return”. Amazingly, they repeated their previous “mistake”, again falsely describing the average interest rate as “return”.

Investor portfolio status and distribution

Users can gain the necessary insight about their portfolio distribution and status in the My Investments page. The dynamic pie chart makes this data easily accessible. It can be optimised even further using my suggestion from the previous clause, especially with regards to finished investments. I recommend including loans sold on the Secondary Market in Finished Investments, which would enhance usability and allow investors to better analyse their historic performance.

Investor portfolio returns

Displayed in the Overview page. In light of the incorrect uses of the term “net annual return” elsewhere on the platform (see above), I would appreciate Mintos’s confirmation that the NAR displayed in the Overview section shows the actual return (based on a XIRR formula, as explained in the FAQ), not the interest rate.

Full loan book access

Mintos allows investors to download a batch of Excel files detailing their full loan book since launch. Find in the Statistics page, under Loan Performance Details.


Transparency & Honesty: Safety

Stating the risk

The basis for trusting any investment opportunity lies in the way it describes risk. Mintos mentions the risk next to the “Register” button on the home screen – good start. They also address risk in several FAQ articles, but I have some reservations about those:

“What risks are associated with investing through Mintos?” – The possibility of loan originator collapse, by far the greatest danger on Mintos, is stated as an afterthought on the topic of loan defaults. It deserves mention as a separate (numbered) risk.

“How safe are investments?” – This article mostly describes the safety measures taken to reduce risk. It should be renamed accordingly. The first article I mentioned should be listed before this one on the “Getting started” category of the FAQ, or better yet: Concentrate all relevant articles in a new category called “Risk”.

“What happens if a borrower does not pay?”, “What happens if a loan originator goes out of business?” – No mention of the very real possibility that the recovery process will fail, leading to loss (the word “loss” must be mentioned).

Measuring risk

Updated 25/8/19: Downgraded from “pass” to “remarks” – see recommendation at the end:

The second expectation from an investment professional or platform is for them to convey the different risk levels of different opportunities. On Mintos, loans with no buyback guarantee are usually assigned a Risk Category by the loan originator. For buyback-guaranteed loans, risk lies in the failure of the originator itself.

For that end, Mintos Ratings for loan originators were introduced in 2018. The assessment methodology is explained, but the exact scoring formula isn’t revealed. More importantly: Mintos ratings should appear next to each loan on the market

Enabling self-assessment of risk

The third expectation is to provide investors with the necessary information to evaluate the risk themselves. On Mintos, loans with no buyback guarantee usually include some sort of summary about the borrower’s resilience and chance of default. Secured loans detail the value of the collateral relative to the loan amount (LTV).

Finally, Mintos is one of the only Baltic platforms to list the effective APR (annual percentage rate) charged to each borrower. This is important for transparency, for measuring borrower risk, and for evaluating the loan originator’s business model and compliance with regulation.

I do have to point out that some borrower APRs look unreliable. The strangest case is Akulaku, which seems to charge between 15% and 376.4% annual interest (very unusual range), while covering almost every decimal number along the way (15.1%, 15.2%, 15.3% …). While I have no indication that those numbers are wrong, they do seem unlikely. Also, the APRs listed in originator pages don’t always correspond to loans on the market.


Operations & Risk: Platform

Overview of operations and risk factors

Mintos enables investors to refinance loans issued by loan originators, and makes money by charging a fee from loan repayments. Mintos does not use its own capital to finance loans or compensate investors, which leaves it theoretically unexposed to risk from loan defaults or loan originator bankruptcy. However, I cannot say that with certainty, considering the ties between the Mintos group and some loan originators (see Transparency & Honesty: Platform).

The large number of investors and business partners (loan originators) greatly contributes to the resilience of Mintos as a business. It is largely agreed that the main risk to investors is the collapse of loan originators, not Mintos itself.

In November 2018. Mintos has raised €5m with the intention of becoming an Electronic Money Institution (EMI) and providing users with individual IBAN accounts (e-wallets).

Growth trajectory

Mintos has displayed an extraordinary rate of expansion since launch, becoming a market leader in continental Europe after just a few years in business. Their latest annual report reveals impressive growth from 2017 to 2018, and 2019 seems to continue this trend.

Profitability

Mintos reached profitability in 2017, its third year in business. However, profitability declined sharply in 2018 – from €196k to €13.5k (or from €241k to €65k, if we take share-based benefits out of the equation).

It is common for rapidly-expanding companies to struggle with profitability. Between 2017 and 2018, Mintos’s salary expenses rose from €810k to €1.53m, and direct client acquisition costs (affiliate commissions and cashback campaigns) rose from €424k to €1.32m. These costs were successfully translated into growth.

Still, the profit margin and bottom line seem particularly low considering Mintos’s business volume, market-leader status, and lack of loan risk. I believe most investors expect Mintos to present more significant and consistent earnings in coming years. Affiliate commissions have already been reduced, which should lower this expense in 2019.

Regulation

Mintos is registered in Latvia, where no specific regulation has yet been enacted for crowdfunding platforms (source 1 [pdf], source 2 [pdf]). Moreover, due to its rather unique model, Mintos does not easily fit into classic regulatory categories: It is neither a lending business nor a direct P2P/P2B platform. As far as I’ve been able to gather, the platform only needs to comply with general accounting and Anti Money Laundering policies.

Latvian authorities seem to be ambivalent about Mintos, initially warning about its risks, but later celebrating the change (pdf) FinTech brings to the financial sector. In late 2018, Mintos joined the Finance Latvia Association, which cooperates with the Cabinet of Ministers.

Mintos was previously rejected by the UK FCA (pdf) when it applied for a license to open a British branch, and [consequently?] stopped working with British investors. This does not impact ongoing operations nor investors from other countries, but does raise some concern about Mintos’s approach to [UK] regulatory requirements.

Once Mintos becomes an EMI, it will be bound to stricter regulation.

Safeguarding of funds

(Updated 6.8.19 19:55 UTC – Corrected my own mistake.)

Financial institutions have a responsibility to protect their customer funds against embezzlement, or in case they collapse. There are two common safeguarding methods: Either insuring customer funds, or segregating them from the company’s own funds into a separate account.

According to Mintos’s Terms and Conditions, “Funds transferred by the User […] shall be kept on any Mintos Account and Mintos shall ensure that they are segregated from Mintos own funds”.

However, the account itself is still registered in Mintos’s name, it is not an official trust account as far as I understand it. At any rate, when Mintos becomes an EMI, separation of funds will be dictated by regulation.

Environmental responsibility

Platform sustainability is important, but so is the sustainability of the planet. Mintos has published an Environmental Policy Statement, and announced its intention to launch an environmental fund.


Operations & Risk: Originators

(As we can’t really meddle in the business model of loan originators, this section is purely informative. It is meant to raise awareness to the risks.)

Overview of operations

“Loan originators” are non-bank lending companies that offer investors on Mintos the option to refinance part of their loans, in exchange for a share of the interest. This allows them to free up cash and grant more loans. Originators are typically regulated in their respective territories as regular lending companies (unrelated to crowdfunding).

The cost of funding through Mintos isn’t low – originators pay investors between 6% to 19% interest (typically around 12%), plus the small Mintos fee. However, it gives them more flexibility compared to taking a loan or issuing a bond. When they obtain a cheaper source of funding they can easily repurchase their loans from Mintos investors.

Buyback Guarantee

Most originators on Mintos repurchase loans from investors when they run 60 days late. This Buyback Guarantee lifts the risk of loan defaults from investors, but puts a heavier burden on originators, who compensate investors using money they may never recover from borrowers. If an originator collapses while having active loans on Mintos (which has happened once so far), recovering the funds would prove difficult. Therefore, the main risk to investors is the collapse of a loan originator

Originator risk must be taken into account by investors when allocating their funds. In addition to Mintos Ratings, I recommend Explore P2P as an independent source for evaluating originators’ financial resilience.

Lending risk and regulation

Most originators on Mintos offer high-interest loans to financially-weak borrowers. Putting aside the moral debate about such loans, they do present some objective challenges:

– High default rates increase risk for lenders. This risk is supposed to be priced in the interest rates, but realistically, some of the originators are still loss-making, or walk a fine line between profit and loss.

– Changes in regulation can have a debilitating impact on high-interest loan providers. One example is Georgia, where new regulation has impacted the operations of some originators enough to warrant a Mintos Ratings downgrade. Such regulation is becoming harsher and more common in many parts of the world, forcing some originators to frequently readjust their model.

– Making loans available to populations which previously did not have access to funds can increase debt levels on the macro scale. Over time, the increase in debt may result in a significant and unpredictable impact on certain economies. The high interest rates associated with those loans exacerbate the effect. The long-term sustainability of this model still needs to be proven.

Diversification

With dozens of originators offering several loan types in different countries and currencies, Mintos presents plenty of options for a diversified lending portfolio. I do have two notes on the topic:
– The joint ownership between some of the loan originators makes the marketplace somewhat more centralised than it first appears.
– While loan types and regions may vary, the risk level of most loans on the platform is similar. Mintos offers few options for diversifying into lower-risk loans.


Contingencies: Preparation for Worst Case Scenarios

Mass withdrawal

Some platforms offer to buy back active loans, which puts them at risk in case too many investors try to cash out at the same time. Mintos only allows selling loans to other investors, which does not pose risk to the platform.

It has been speculated that Mintos uses its own funds as a temporary buffer to increase liquidity for Invest & Access users, buying their loans and holding them until they can be passed to other investors. Whether that’s true or not, Mintos was wise not to commit itself to this potentially-dangerous practice, clarifying that liquidity depends on demand.

Finally, Mintos only allows originators to fund some of their loans through the marketplace. A mass reduction in investment volume on Mintos is sure to affect originators, but not likely to stop their wheels entirely.

Fake loans

Potentially, originators can list fake loans on Mintos to achieve the effect of a “Ponzi scheme” (legally: embezzlement). This risk is very real in a loan marketplace with multiple intermediaries and little information on the end borrowers, who come from all around the world.

By watching the fireside chat with Mintos CEO in the P2P Conference in Riga, I happen to know that Mintos runs spot checks on loan originators, requesting additional data about random loans to make sure they are legit. But remember, only information available on the platform counts in TORCH evaluations. I recommend adding a detailed explanation about this topic to the FAQ.

Platform collapse

The servicing of active loans is performed by loan originators, and should not be affected in case Mintos collapses. Originators would struggle with transferring loan repayments to investors, but Mintos has made arrangements to provide investors and liquidators with the necessary data to overcome this difficulty.

Originator collapse

In case of loan originator collapse, Mintos represents investors’ interests in legal proceedings until the recovery of the funds. Sadly, the Eurocent experience has taught us that collecting funds from a defunct lending company isn’t easy, and the process does not necessarily correlate with the expectations set forth in the FAQ (Eurocent loans on Mintos had the Direct investment structure).

Mintos claims to have tightened supervision on originators since that incident. Some originators also use a separate SPV for their dealings with Mintos investors, which is supposed to provide another safety buffer in case of collapse. The effectiveness of those measures remain to be tested over time.

No provision fund

Some platforms offer a provision fund to compensate investor. I’m ambivalent about this practice, as the deductions needed to build up a significant fund can dramatically reduce returns, sometimes leaving investors no better off than if they had lost money on defaults or originator collapse. There is also a question of fairness: Should those who invested in low-risk loans help compensate those who invested in high-risk loans?

So I am not currently advocating for a provision fund, just letting you know that this feature is not offered on Mintos.


Concluding Remarks

While this report may seem negative in part, the fact that I’ve been able to gather all this information speaks in Mintos’s favour. They have a solid business model and the right idea about transparency, but still need to improve on a few fronts.

With a relatively large team, positive financial balance, and strong backing, I am confident that Mintos has the ability to amend its shortcomings. Now it’s up to them.


I am not a financial expert nor an investment professional. My observations are based on knowledge gathered online, as well as my thoughts and personal experience as an investor.

While I put a lot of effort in research and fact-checking, it is possible that some errors or inaccuracies have escaped my notice. Readers are encourage to point out any mistake or missing piece of information.

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