Some say it might be less, like $20bn.

So much for “hedge funds are going down with dignity” (FT column a week ago):

In an awful year for everyone, hedge funds have remained a beacon of free market principles. It is small comfort, but it is something.

One amazing detail is that regulator was informed a decade ago that Madoff is running a giant Ponzi scheme:

A wrinkle in the case is the complaint dating back nine years to the SEC by a securities industry executive named Harry Markopolos. He contacted the agency’s Boston office in May 1999, telling SEC staff they should investigate Madoff because it was impossible for the kind of profit he was making to have been gained legally.

First Posche, now this. Not a good month for hedge funds.

(fot. rosendahl@flickr)

I kind of took it in as a valid explanation but never fully internalized the notion – in Poland, when selecting a bank, hardly anyone actually considers whether it’s gonna go bankrupt or not. You never hear banks falling in Poland, except for some obscure “pocket banks” in the distant past of the early days of the market economy.

Even with the lest prestigious and smallest banks, trust used not to be really the major decision factor.

Maybe that is going to change soon. Just in (gazeta.pl):

Investors wondered who would be the next candidates for bankruptcy. Commerzbank, owner of the Polish BRE Group, fell almost 23 percent on the Frankfurt stock exchange. Trading of UniCredit (strategic shareholder of Pekao) was suspended altogether on the Milan stock exchange, after they fell 9%.

In December 2007 I quoted this passage I found in FT:

(…) two giant and interlinked bubbles burst simultaneously – one in property, one in credit – leaving banks and investors on the brink of bankruptcy, some hanging on by their fingertips

That was before the balls started to drop, and the mood was cautiously optimistic then.

It sure feels like something similar with regards to banking situation in Poland right now. Things are falling apart abroad, but at home everything is supposed to be in order, except for the performance of investment funds, which keep looking for the bottom – but this is generally accepted as an isolated and contained phenomenon.

Looking into the future of Polish financial sector in the next 6 to 12 months, maybe it’s time now to calculate in some turbulence.

You can download it from Gemius webpage:

English version of the report

Polish version of the report

The research was an idea I had after February Bootstrap meeting devoted to social lending. Initially I thought of writing a simple article, but then decided that it would be cool to have some original primary data. So I asked Gemius (leading Internet research agency in Poland) to participate, and then involved Accenture as well.

Below a couple of comments and slides from the report.

At the moment, three social lending sites operate in Poland (Kokos, Finansowo, Monetto). Compared to other countries in Europe and globally, it’s quite a lot. In some larger and more developed EU countries P2P sites are yet to appear.

After couple of months from the launch of first site, 1/4 of Internet users in Poland declared that they had heard about the social lending concept. Of those, 24% would consider P2P loan, and 8.5% would consider investing in social lending. These numbers can probably be seen as a promising result – among those aware of the concept, social lending beats specialized fast-cash providers and loan cooperatives as acceptable source of a loan.

Gaining popularity is one thing, but high risk of potential borrowers will pose a serious challenge for the social lending sites. According to the survey, group interested in the P2P loans more often had problems with repayment in the past, including 90+ days defaults.

More in the report.

If Provident’s goal was to give social lending additional publicity, then it greatly succeeded. Average reader will remember from the article that you can get cheap loans on the Internet and that Provident is expensive and therefore afraid of social lending sites.

Fortunately for Provident, Gazeta Prawna is probably read by a tiny percentage of their target customer base.

According to the research that we did (Accenture and Gemius), this is a rather promising idea for Kokos – Allegro is the top site that potential borrowers actively use (i.e. visit at least once a week):

(there is similar data for potential investors, among which Nasza Klasa has better penetration)

The full report will be public shortly, also in an English version.

More recent post: Nasza klasa and facebook

Monetto was kind enough to send me their press release, announcing partnership that they concluded with Nasza Klasa (Polish equivalent of classmates, but more of a Facebook phenomenon in terms of popularity).

Not that I could do anything with the material while in the Ukraine, but still a point for their PR.

One curious thing is the homepage screen shot they attached to the press release.

Some static elements are evidently in a “draft” state at the moment, and it’s not clear if the core functionality (transactions) has the same status. Placeholder for press snippets shows that Monetto has really high hopes. Folks at bankier should take note.

Back to the main point. From the press I understood that:

• Monetto signed letter of intention with Nasza Klasa regarding the partnership, which will work as the following (in my understanding) -
• Users of Nasza Klasa will be able to “confirm” their profile using Monetto capabilities (more info on blog entry: “test” money transfer and sending ID scans by email)
• Additionally, NK user will be able to indicate on his profile that he wants lend/borrow money
• Nasza Klasa hopes that it will improve credibility of the service (validation of profiles) and reduce problem of fake profiles
• Monetto hopes that users redirected from Nasza Klasa will in part get interested in P2P lending and use its intermediation
• The actual contract between two sites has not been signed yet

Meanwhile the release was picked by Gazeta Wyborcza, which reprinted it, without hesitating to spin the point about raising Nasza Klasa credibility to describe it as a site which “more and more often raises mixed feelings”. Get over it, Gazeta.

But in the end they comment that the deal has a high potential for both sites and can harm competitors a lot and especially kokos.pl.

My first thoughts on the deal below.

• Clearly having a user flow from a popular social site would be of tremendous advantage to Monetto
• But is profile verification really an attractive driver for users of Nasza Klasa? Why would anyone want to verify a profile on NK? It is used to post vacation photos and comments on forums, hardly a credibility-driven activity
• Moreover, if someone joins my class with a proper name of a classmate and his photo, then I’m pretty satisfied with the chances that this is the actual guy, and even if not, who cares
• Don’t get me wrong, fake profiles might be a problem for NK itself, but is it really for its individual users?
• Are “friends” on Nasza Klasa a good group of potential lenders/borrowers? In my case for sure not (lending to people I haven’t seen for 10 years?). Are younger people using NK? I don’t know
• Antyweb adds that NK users will not appreciate being marked as “in need of money”
• On the other hand, portals like Goldenline have more “serious” profile, and users might it attractive to “add value” to their profile by validation (for example in hope to increase chance of being picked up by headhunter)
• Surely Goldenline has less users, but they are more “business” oriented – but still with plenty of students – and Monetto wants to target more serious loan tickets (at PLN 3,000)

I’m sure Monetto will benefit from marketing point of view, not so sure about target group. As for Nasza Klasa, I cannot see practical advantage, on a first glance (money from referrals to Monetto probably neglectable).

Interesting comment on netto post – Ols suggests Allegro as a better partner, because additional verification makes sense for an auction site. My first thought was GL because it’s social network, but allegro also makes quite a lot of sense.

This time it was in an unusual for boostrap form of a panel. Meeting took 3 hours, but I found it very interesting. Technical people might beg to differ, though, as tax/legal discussion was really exhaustive (exhausting).

I made some comments below in the notes, but here I can also share my “first impression” of the P2P lenders present. It is really first impression because I didn’t bother to check them myself, so some doubts below might be result of this.

• Finansowo – approach to start as simple as possible, no collections or support in executing transactions between peers. The biggest risk is that some things that they ignore seem critical (collections).

• Monetto (blog)- most advanced approach, ensured partners from the beginning, including bank (mBank) and collectors. The biggest risk is that they start with a very complicated machine that no-one will use.

• Kokos – midway between the two, with the advantage that it is already up and running.

On a first glance I like Finansowo and Monetto, because they follow clear-cut concepts of simplicity and exhaustiveness, while Kokos was less clear, at least as much can be judged from the presentation, and also takes cautious approach regarding some legal challenges (e.g. possibility to grant anonymity and stick to electronic contract form).

Presentation of Arkadiusz Hajduk about his P2P startup (IOU Central):

• The startup was initially located in Denmark
• Two guys on a sofa
• I liked the quote – “expert is a person who committed all possible mistakes in a narrow field of specialty”
• Idea was inspired by prosper
• They didn’t bother with business plans and presentations (note: maybe not so good in the end, given later credit history problem, see below)
• Nevertheless, they got angel from early on – entrepreneur, house builder
• Features of their angel – did call from time to time, but otherwise didn’t require much reporting, in retrospect now they would prefer someone more of a “mentor” type
• They coded for 4 months without office
• Then they got office, at respectable location (good for customer trust)
• They coded another 6 months when they had office
• First version was seen and tested by some 30 people
• Operating model assumed that they don’t make credit decision or take on risk – all this is on the lender
• Highlight of the “growth” period – 90 minutes on the front page of a major business portal
• After launch, lenders turned out not a huge problem; in a first week, one person offered equivalent of ca. PLN 50k
• However, huge problem with (good) borrowers
• Also, in Denmark there is no access to credit history (only yes/no credit problems query possible)
• Side note: banks in Denmark do not care to advertise to people more than 25 years old, because no one ever changes the bank
• They had two evident fraud cases
• In the end, business model didn’t fly because of borrower problem (people took wait-and-see approach), resulting in the “decline” phase
• Luckily, they were approached by people from Canada, who had non-technical capabilities in the area but needed technology platform, and they sold out
• Angel apparently got 150% of his initial contribution
• Lessons learned: don’t hesitate to kill your own ideas

Then there was a panel.

Definitions

• P2P lending – general term, people lending to each other (online I guess)
• Social lending – more specific, people lending to other people they know, like relatives, colleagues etc. – more like social networks, not really lending to strangers

“Competences” represented by the players

• Kokos – backed by Blue Media
• Monetto – some seed fund, experience from Inteligo, Moje Rachunki, Central Bank, on top of this Sebastian Kwiecien

Tax & legal stuff

• (this was most heated and longish section of the panel and I think more technical people must have been fed up with it)
• “Belka” tax has to be paid (19% of financial income)
• There was some longer discussion about legal operations tax (or whatever it’s called)
• • Finansowo mentioned some threshold of PLN 1000 up to which there is no tax, but this apparently relates to buy-sell contracts and not loans; btw finansowo seemed “happy-go-lucky” to me at times and in particular they don’t seem to care so much about legal stuff, or at least not so much as other guys
  • For loans, limit is PLN 5000 for transactions with one person (in three years?), and PLN 25,000 with multiple people
• Then another quarrel whether it is necessary to have written agreement, Kokos thinks that it is necessary (btw Kokos founder is a lawyer) with deals over PLN 500 to be valid as evidence, while Monetto thinks electronic form is just fine
• Then another about people doing P2P lending being classified by tax authority as conducting economic activity (because it would be continuous and organized etc.)
• Then another about possibility to have anonymous contract between parties, Kokos thinks not possible (evidence again), Monetto plans to have such option
• Then another about whether P2P sites are in the deposit business through blocking money, which would be illegal according to banking law etc.
• There was a question I would ask myself, ie. whether it wouldn’t be easier to just go in a cooperative bank model (SKOK). However, they considered it and there are some barriers related to entering SKOK association (need to pay it money for admission, software, etc), and also some day SKOKs are expected to lose their privileged position, so little potential for future
• Requirements related to fraud prevention (term of the day: “social laundry”) – Kokos thinks they are obliged to inform authorities, others think they are not required because of the small transaction limits, or because the banks already to it for them when money transfers are executed
• Companies – not in scope, because, I don’t remember exactly, they need written form or something like this

Operating model

• Type of loan:
• • It was emphasized that loans should be purposeful
  • “I don’t give money to the beggars”
  • Predefined purpose types
  • Possibly functionality to verify that money was used for declared purpose, or even cashless loan execution (ie. lender pay money directly to the shop, which delivers product to the borrower); like POS loans, cool! (but seems too complex)
• Average expected loan ticket:
• • Finansowo – ca. PLN 500
  • Kokos – ca. PLN 1,200
  • Monetto – ca. PLN 3,000 (thinks going to P2P portal for PLN 500 is ridiculous)
• Client verification and credit decision:
• • Finansowo – does not plan to do any checks including BIK and KRD (debtors registry), “not to be more demanding than the banks”, they do however check the client’s credential through 1 PLN money transfer, and verify mobile phone; in general their approach is “loan tickets will be small so potential losses will also be small so the customers will not hurt and moreover customers can diversify loans they give”
  • Monetto – will do checks in BIK, KRD
• Transaction execution:
• • Finansowo – they will act just like an intermediating party, “will not even touch the money”, I guess people will simply transfer it on their own
  • Kokos – they provide some support for executing transactions, didn’t understand exactly how, but it is not bulletproof, e.g. money to be lent is not blocked, so lender may fail to fulfill their part of the transaction in the end, also customer may not receive all the money he requested (with a minimum of 50%) etc.
  • Monetto – seems to be (planned to be) most tight, money block, 100% of the amount requested guaranteed etc.
• Time to money:
• • Finansowo – 1-2 days depending on where clients have current accounts (ok, but they hardly do anything other than match parties)
  • Kokos – 10-12 days since the day of registration
  • Monetto – claims a dozen minutes or so (ooook)
• Collections:
• • Finansowo – doesn’t plan to have support for collections in the beginning, “trust people”, lender and borrowers are supposed to be acquainted etc.
  • Kokos – n/a
  • Monetto – expected to have Collections (through partner) from the very beginning
  • (My comment – if P2P is like Consumer Finance business, then collections is critical from the beginning and going to the market without it would not be recommended. On the other hand, perhaps peers who know each other can handle collections on their own, which would be pretty convenient. Personally, I would find pushing someone I know to pay me installment akward, I would prefer some “third party” to do the dirty job instead, but I’m not in the target group)
• Repayment:
• • Not discussed but I find it quite interesting – if my loan is granted in pieces by 10 different lenders, do I have to execute 10 money transfers each month? Do sites provide support for this? Who calculated repayment schedule etc.

Value proposition

• Even though P2P is supposed to be more financially attractive than the banks, panelists emphasized more important benefits attracting the customer, especially “personal dimension of the finance” – having direct control over lending, or even understanding it as “helping” people
• Also, lenders often fail to understand that their advertised interest rate is composite, i.e. they earn it only till first installment, because then credit balance decreases
• Selling proposition by players:
• • Finansowo – “help someone”, easiness
  • Monetto – safety, more interest than on bank deposit, no risk

Target customer group

• All sites target young people, defined 22-34
• Finansowo especially targets students
• (Students are the worst borrowers. Also, some “peers” must act as lenders, and finding them among students might be difficult by definition. When I was a student I don’t really remember lending larger amounts from other students)

Business model

• Finansowo:
• • Expects 1% commission
  • Nevertheless, commission revenues will be “symbolic”, more important will be referral revenues (e.g. from the banks)
• Kokos:
• • I forgot how much commission
• Monetto:
• • Commission, but expects to earn money on other services, on top of P2P lending

Market

• How are new ideas received?
• • Denmark – worst
  • Canada – better than Denmark, but still they wait for six years before considering idea proved and implementing it in Canada
  • Poland – surprisingly open for new ideas, for example regarding P2P lending, there are several sites in the US, in China there are 2, in other countries 1 or none, while in Poland four of them are already starting
• Market share of P2P – Monetto found some Gartner projection that in the future (don’t remember which year) P2P will have 10% share in the lending market (hopefully online P2P, because as for offline, I expect it to always having much more than that already)
• Important trends:
• • Some directive will allow international money transfers for price of local ones in 2009, and they should not take more than 1-2 days
  • Opening of P2P lending in muslim countries, where they apparently are not supposed to use interest on loans (so P2P in competitive position against the banks? perhaps that was the idea)

Launch dates

• Kokos – already on the market
• Finansowo – within a week
• Monetto – “within a bit more than a week”

The best thing to get, of course, would be a set of clusters with significantly different loan performance (i.e. share of bad loans) that the others.

I’m using Cluto.

It is not particularly user-friendly. It requires input files that I need to kind of manually generate from Access and then fine-tune. And it is not excel add-in, but a command line program. But thanks to this it can handle my 100k records (my Excel version has 64k rows limit).

So far no results. But wait… just finished computing using the graph method. It took 17 minutes.

Nope. At the moment most distinctive cluster is ca. 6.5% better that the average in case of defaults. And ca. 11% in case of defaults considered fraud. I’m not impressed.

Guess they need to give me more data from the application. Currently I test on 6 variables and some are loan and not customer related so there is a field for improvement.

Or maybe I should read the manual some more and figure what what are the different optimization methods.

It is a fully fledged solvency crisis that has arisen because two giant and interlinked bubbles burst simultaneously – one in property, one in credit – leaving banks and investors on the brink of bankruptcy, some hanging on by their fingertips. Yet there is nothing the central banks are offering at this stage to alleviate a solvency crisis.

Sounds rather dramatic – “some hanging on by their fingertips” – doesn’t it. Maybe we are currently going towards the edge macro-wise and we only start to realize.

Note that probability of such event is very low currently: all Internet banks in Poland belong to strong financial groups, and Polish banking sector in general is healthy and boasts record profits.

However, the scenario in which people are able to withdraw their funds by doing a few clicks (instead of crowding in front of the branches) based on a rumor – and rumors can now circulate faster thanks to also Internet – is quite scary. Also, deposit accounts of Internet banks have usually very liberal conditions of withdrawing the funds before maturity.