10 warning signals that a peer-to-peer platform is a scam

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P2P lending 10 warning signals

When investing in the asset class P2P lending, you need to consider the platform risk. The platform risk stands for the risk that a P2P platform can go bankrupt. As a result, investors have to fear for their invested capital because in the past, insolvencies of platforms often led to a total loss for investors.

This makes the platform risk at least as important as the credit default risk, which you also have to expect when investing in P2P loans.

We present 10 warning signs you should watch out for to avoid falling for a fraudulent P2P platform.

Signal 1: Unknown and unsuitable management (board of directors)

P2P warning signal  Management

If you don't find a team page on the platform's website where the CEO or management introduce themselves, this should make you suspicious.

You should also be suspicious if the management has no or almost no experience with finance and credit.

A warning signal that should not be ignored would be if you come across information that the managing director or members of the managing directors have already been directly or indirectly involved in a fraudulent act.

CEOs of trusted platforms typically want to be seen. That means you can meet them at conferences and webinars or they give interviews to journalists.

Signal 2: Company address is only a letterbox or the address changes frequently

A typical trick is that the company has no real premises, and there is, in fact, only a mailbox (letterbox company).

In this case, only one letterbox is rented within a district that is considered to be particularly upscale in order to feign respectability and exclusivity.

A constantly changing company address can also indicate that something is amiss.

Nowadays, a mere company address, regardless of location, is nothing special. There are dedicated service providers that offer companies only letterboxes, for example, to look particularly international. Also, the shared office concepts of for example WeWork make it easy to register an own company address.

Signal 3: No or only very limited accessibility

P2P warning signal  accessibility

Serious platforms take the topic of service & accessibility very seriously. You can't expect platforms to answer you within minutes, but within 24 to 48 hours should be within expectations.

The issue of accessibility is especially critical when it comes to deposits and withdrawals. For example, if you cannot withdraw your money and it takes days for someone to get back to you, you should not continue investing on the platform.

The only exception to this are serious technical problems, which do not indicate that the platform is fraudulent, but should not actually occur either.

Signal 4: Constantly changing bank details of the platform

If the platform frequently changes its bank details, you should not ignore it.

Even a change of bank details can be a serious sign that something might be wrong.

As part of banking secrecy, banks are obliged not to share information about customers with the public, unless there is obvious fraud. But even that is not easily detectable until fraud has actually occurred.

Banks can then, in order to protect themselves, unilaterally terminate a business relationship with a short notice period.

Exceptions to this would be if the platform credibly and also with a certain lead time informs its investors why the bank account is changed.

Signal 5: Negative customer reviews on well-known portals

P2P warning signal: customer ratings and complaints

The Trustpilot rating platform is known to many people. Also, every internet user is probably now aware that the platform also has its weaknesses.

But, if a platform does not even bother to present itself well on Trustpilot and dozens of complaints from customers are added, this is also a negative signal that you cannot ignore.

Customer satisfaction is closely related to the growth of the platform. Too many dissatisfied investors will limit or even reverse the growth of a platform.

This can lead to reputable platforms gradually turning into dubious platforms - with serious consequences for you as an investor.

Signal 6: Changing general terms and conditions that disadvantage investors

The terms and conditions can also tell you how serious a platform is.

This means that the terms and conditions regulate how the conditions can be changed and with what deadlines. Likewise, termination rights of the investors but also of the platform should be regulated.

Constantly changing terms and conditions that disadvantage investors are also an indication of the lack of seriousness of a platform.

Signal 7: Not apparent how loans are brokered via loan originators

P2P warning signal: how do loan originators grant their loans?

If the platform cooperates with loan originators, you should at least check on a case-by-case basis how the loan originators arrange the loans.

With many loan providers, for example, you can see directly on the web how they arrange their loans. We have shown this for Twino, for example.

If you cannot find a single loan originator on the web, which also cannot be logically justified (e.g. due to geo-blocking), you should ask where the loans that are offered on the platform ultimately come from.

A characteristic of fraudulent P2P platforms is that there is no real business activity. If it is not apparent to you how the loans are brokered, you need to stay away from the platform.

Signal 8: Disbursement problems - investors do not get their money

Investing money is a matter of trust. If you entrust your money to a P2P platform and the platform does not pay out your money on demand, this is critical.

The only reason that could be accepted to some extent would be hacker attacks, for example via bot networks. These bot attacks aim to completely paralyze websites.

If you are permanently unable to get your money from a platform, you should try to withdraw your money immediately and possibly call in a lawyer after 3 to 5 days.

Not only do problems with payouts rapidly erode trust in a platform, they are also particularly critical because (when a fraudulent platform is set up as a Ponzi scheme) payout difficulties often occur just before the platform collapses.

Time and again, P2P platforms are suspected of being Ponzi schemes in general. Using the Mintos platform as an example, we have shown how high the risk is as to whether Mintos could be a Ponzi scheme and what conditions would have to be met for this suspicion to be justifiable.

Signal 9: Fake loans, which could indicate a Ponzi scheme

P2P warning signal: fake loans

Fake loans have the potential to bring down a P2P platform in a very short time.

As an investor in P2P loans, you should fear nothing as much as becoming a victim of a Ponzi scheme. Such a system thrives on non-transparency, and there is no real business rationale. In the context of P2P platforms, this means that you do not invest in really existing loans in the first place.

For example, in the case of the P2P platform Grupeer, it came out in March 2020 that the three loan originators Lion Lender, Epic Cash and Monetria are companies that do not even exist. If you as an investor had invested in the loans from these non-existent loan originators, you would have been actively deceived because the loans did not exist.

If you notice fake loans on a P2P platform, you should immediately try to withdraw your money.

Signal 10: Above-average returns that cannot be explained

Another warning signal for a dubious platform could be above-average returns.

By now, some P2P platforms have been able to establish themselves on the market. The platform Bondora from Estonia, for example, has been around since 2009.

If new platforms coming to the market advertise returns of 20% p.a., you should immediately become suspicious. High yields are often used by fraudulent platforms to quickly attract many new users.

While these loans are not necessarily fraudulent, returns and risk are very closely related.

If a new platform appears and directly promises comparatively high returns that cannot be explained objectively, you should react cautiously.

Summary and conclusion

We hope that we could give you a good orientation with the 10 mentioned warning signals, when it becomes dangerous for you as an investor. Platform risk is the most dangerous of all the risks that can affect you when investing in P2P loans.

While the regulation of crowdfunding platforms adopted by the European Union will make it much more difficult for scammers to harm investors, the best way to protect yourself is to actively react to unexpected events and protect yourself.

These 10 warning signs are based on our observations and experiences with P2P platforms Grupeer, Envestio, Monethera and Kuetzal. All platforms have in common that they deceived investors, either partially or fully.

Originally published 11 August 2021, last updated on 14 September 2021

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