Before investing in any financial investment, it is always customary to be concerned about how ‘safe’ your investment is, whether through a traditional financial institution or an online P2P platform.
Sadly one such area that has been ripe for scams recently are P2P platforms.
Many have been duped into handing over their funds, so Monestro put together this guide to provide an understanding of P2P lending scams.
Plus some examples of how to help prevent being a victim of a peer-to-peer lending scam.
What are P2P scams?
Peer-to-peer lending is a form of crowdfunding connecting lenders with borrowers through a platform as opposed to a typical financial institution.
Lenders are willing to invest their money to borrowers who are seeking capital. Lenders, known as investors, received interest on their money lent, thus providing a return on their investment.
Because P2P lending has generated higher returns for investors, this type of lending has proven very popular amongst investors.
However, as with all financial transactions and lending, there are risks. Sadly, peer-to-peer lending has seen a spike in fraudulent attempts to dupe investors and consumers out of their money.
One such scam is when a P2P lending platform begins to block investors from withdrawing their funds and closes the site down.
Whether the P2P platform was created with the intention of defrauding investors or closed due to mismanagement and lack of liquidity is often not known.
Another frustrating P2P platform issue is where payments are not collected from the Loan Originators (LO). Thus, money is not paid out to investors in a timely fashion but takes more time than usual.
Which P2P lending do scammers target?
There are various forms of P2P lending; however, the main three types are:
- Business lending
- Real estate lending
- Consumer lending
Business lending is where investors fund either secured or unsecured loans to startups and SMBs. A personal guarantee from the borrower may also be required to secure P2P investment.
Property (real estate) P2P loans are secured on the property the loan was used. If the borrower defaults, then the platform can repossess the property and sell it to redeem the loan.
Consumer lending provides small and unsecured loans to individual borrowers by connecting them with lenders, who seek returns from the interest applied to the loans.
One of the three types of mentioned above of P2P lending possesses a higher risk of being subject to fraudsters: business lending.
As P2P lending is executed through online platforms and not financial institutions, it has not passed the rigorous due diligence checks expected of larger regular lenders.
For newer businesses, especially startups and SMEs, it can be a struggle to obtain funding when the business is young.
Small businesses have little option but to turn to online platforms that offer investment, and one such solution is P2P business lending.
Most business is conducted online and now sees less face to face due to the recent global pandemic. Obtaining money quickly and easily without rigorous criteria to follow has never been more straightforward.
Whilst this may sound tempting, the lack of checks and balances when seeking capital has opened the door to fraudsters who target investors and consumers into falling for a P2P scam.
How increased regulation is preventing P2P scams
Compared to the United States and China, where crowdfunding is at its strongest, P2P lending is still a relatively smaller market in Europe.
However, it is proliferating within the EU states, and there has been a surge in regulation to combat unscrupulous fraud scams. However, this legislation is various per EU state – there is not one harmonious legislation covering the entire EU bloc.
Furthermore, investors should note that not every EU state has legislation concerning crowdfunding and P2P lending. This includes two of the Baltic states, Estonia and Latvia.
Plus, because a country that does have P2P lending legislation, does not make it immune to P2P scams. In 2015, under investigation for misconduct, Swedish platform TrustBuddy went bankrupt.
The European Commission proposed better regulation on European crowdfunding in 2018. The concept was to create one set of rules for all European platforms to comply with rather than various regulatory bodies.
The idea was to minimise the risk of scams and provide more legal backing to investors.
What to look out for when assessing a P2P scam
Scammers are becoming more inventive in their ways to convince P2P investors and consumers to part ways with their money.
The list below is not exhaustive, but these examples are from our own experiences of being scammed:
- The identity verification process is too easy and muddled.
- Depositing your funds is a significantly extended and painful process.
- The bank account details change frequently.
- The bank account details are in one country, yet company offices are in another.
- Suppose the platform offers an enticing offer to attract new customers. (Note this could also be legitimate, but if something is too good to be true, then maybe it is).
- If the P2P platform asks for an extortionately high starting investment, for example, €5,000 (in our experience, anything more on €1,000 should be seen to be suspicious for real estate lending platforms).
- The monthly average return is unrealistically high compared to the risk level. 20% returns should mean a high risk, low risk at 20% returns – something is amiss.
- A national body does not approve the P2P platform.
- You have spoken with other investors, and they have delays in accessing their funds, but it is very easy to make P2P payments.
- You ask the platform for answers, and they never respond.
- Changes in the company’s terms and conditions. (Again, this can be legitimate, but frequent changes should be flagged as a warning).
- Suppose the platform’s funding volume sharply decreases whilst the amount of projects remains constant or even declines without explanation. This could be a red flag.
- The P2P platform’s features have been disabled or changed, like withdrawing funds from portfolios.
It is not uncommon to get high returns from P2P lending – it’s why investors flock to reputable platforms. Higher rewards will come with higher risks to your investing capital, which is logical when investing.
Always be suspicious of any platform offering low-risk, high-reward returns. This will likely be a scam.
Another popular scam was to attract investors with a bonus for investing in a P2P lending platform before closing the platform down.
Introductory bonuses can be legitimate – so they don’t necessarily mean a scam. Beware if the platform pressures you into investing quickly without doing your due diligence, as this is a blatant attempt to get investor’s money before the scammers plan to close the platform down.
Avoiding P2P scams
Investing in P2P lending does come with some risk; the higher returns reflect the risk. However, to mitigate any potential scam, it is imperative to your own thorough homework on any platform before you even consider parting with your money.
It is easy to rely on reviews performed by trusted third party websites. Even if they contain some negative and positive reviews, equating to a more generalised customer experience, it is critical that they not be considered final to investing.
It would be best if you spent ample time doing your due diligence on a potential platform.
Never trust in promises of high rewards unless it is evident they contain some significant risk that is relevant to the return – more reward, higher risk to your investment.
Plus, because a platform has a lot of active investors, this does not mean it is well trusted. Ponzi schemes have a lot of active investors, and we all know what these do. Always dig deeper and examine the company behind the platform.
What is a Ponzi Scheme?
A Ponzi scheme is an investment scam where scammers promise high-rewards with low-risks investments. The scam generates returns for early investors by passing on investing funds from enticing new investors. This works as a ‘pyramid,’ where the initial investors obtain funds, whilst the newer ones eventually lose as they pay the returns of investors above them in the ‘pyramid.’
Ultimately every investment will carry some risk. But check the following when considering a P2P lending platform to minimise the possibility of dealing with a P2P platform scam:
- Check the company background and the management team.
- Scrutinise the terms and conditions, particularly if they mention changing them without prior notice (should be at least 30 days).
- Where is the bank account located – safer if it is in the same country as the office(s).
- Is the company address virtual or physical?
- The platform is happy to share a loan agreement template before investing.
- Does the P2P platform have a BuyBack scheme?
- The company offers full disclosure of loans and borrowers.
Losing money through a P2P lending platform does not entail that you were part of a scam or duped into fraudulent activity.
Investing in P2P loans provides high returns yet often has higher risks, too, it’s all part of investing. Without taking a risk, you’ll not receive a credible return.
Merely ensure that you have done your homework before investing in a company’s P2P lending platform. Even a quick ‘Google’ for a list of scamming websites will help you begin your due diligence.
For every negative story, there are hundreds of successful ones where both investors and consumers have obtained much-needed rewards and capital.