In this article you will read about:
- What is Alfa Finance Group?
- What makes them successful or makes them fail?
- How do they earn money?
- What can hurt the company?
- Do they have real business behind?
- Why they don’t do Buyback anymore?
- How can I get as much money back as I invested?
Why is it important to remain calm?
As I mentioned in the previous articles, our main business is lending activity that is financed via shareholders, institutional investors, and via P2P platform DoFinance.
What is Alfa Finance Groups main business?
Alfa Finance Group started its micro – lending activities from its own funds in late 2015, when it opened its office in Poland. To start the online lending business the company had to develop a sophisticated IT system and create call centers that could service the business. To do that the shareholders’ funds were invested and used for developing the system, as well as, they were invested in the initial lending capital.
What makes them successful or makes them fail?
Since the success of a micro – lending business is based on statistical scoring models and servicing bigger client base. While the scoring models are adjusted, there are losses due to the higher level of defaults. The client base is constantly changing, hence scoring model adjustments is a never-ending process. Especially challenging it is when the market becomes very volatile or there are external shocks, like we are experiencing right now. With changing scoring models, IT system functionality has to be constantly adjusted and changed.
The reason is that processes how the clients apply for loans, how they receive communication, how the debts are collected has to be constantly changed in order to improve the scoring models and reduce default rates. During this learning process, the shareholders and institutional investors’ money is invested (and/or spent) in order to learn about the client base and issue loans with a greater success in the future. The high bet here is that we learn as much as possible about our clients, and that the future will be stable enough so that we can generate enough income to cover the investment.
How do they earn money?
Alfa Finance Group earns money by issuing small loans with a size ranging from 30 EUR up to 1500 EUR for a period of up to 30 days, unless the loan repayment date is extended by the borrower, which happens very often. The borrowers pay interest that majority would consider fairly high. However, taking into account the small size of the loan and the sophisticated scoring process that involves accessing several (paid) databases, calling client, verifying his documents, etc, in the end we end up paying substantial part of the revenue from each loan for the external and internal underwriting services.
Secondly, the single biggest expense is defaulting loans. We are not denying that our target audience is sub-prime to near-prime borrowers, who have high levels of defaults. Consequently, the risk has to be matched with return and interest.
The only source of income is interest earning and extension fees that are received from customers. It is important that we receive sufficient amount of interest earnings to cover the expenses – variable and fixed. Consequently, there is a minimum loan portfolio that we must maintain in order to be able to cover the costs and run a sustainable business.
By far we consider that we are one of the most efficient companies in terms of cost structure and how much we spend on indirect costs. Our business (lending and P2P) in 3 countries is managed just by 12 very well educated and experienced people in the head office! Also lending companies offices have gone through significant reductions and cost cuts in every possible way to maintain efficiency!
What can affect the financial health of this company?
The biggest fear of the business is systemic shocks, crisis that may happen at any moment. In order to avoid exposing to regional risks, already at the early stages, Alfa Finance Group started developing its lending business in very far and distant countries – Poland – 8th biggest country in Europe by population and Indonesia – 4th biggest country in the world by population size. The idea was that these regions are not connected with very strong economic or social ties, hence the risk that both countries could suffer significant systemic shocks is almost impossible, until now.
The second biggest threat is what some may know by terms “margin call” or “bank run”. That is a situation when a substantial part of investors is requesting withdrawal at the same time. The result is not that we have to open our wallets and pay out investors’ money! The result is that the company is forced to reduce its loan portfolio, hence shrink its revenues and risk being unable to cover its direct and operational costs!
Both of the above are happening now!
This is the reason why we are trying to convince each and every investor to maintain their investment portfolios with us instead of withdrawing. It is not to cover unreasonable expenses, it is because we are striving to maintain the business up and running and survive the turbulence and get out in the other end with the investors’ money safe and sound!
How can I be sure that they are a real business and are they going to lose my money?
We have repeatedly invited our investors to visit our offices in Latvia, Poland, or Indonesia. Even now, our dedicated and highly motivated people are still coming to their offices where allowed and all of them are doing their jobs – you are most welcome to visit us.
Secondly, our lending businesses – kreditcepat.co.id, tanikredyt.pl are fully operational. You are welcome to visit these websites and test that they are live!
In order to save the investors and put the business back on track, we are updating our scoring models to avoid lower quality loans with higher default rates and maintain sufficient loan portfolio to generate enough earnings and cover all the costs and sustain the current or higher level of assets that would be able to cover all the liabilities.
Secondly, we have reduced our already small staff by 30% and cut costs in certain positions by the same proportion. During these turbulent times, also the shareholders are working full time in this business without receiving any remuneration!
Why the company is not performing buy back ?
I would like to note that Buyback according to our Assignment agreements and User Agreements always worked as a right of the Loan Originator. Normally, lending companies do not hold accounts full of cash – that would be waste of the resources of the investors!
Instead the purpose of the lending company is always to put as much capital into loans as possible. During the normal times we were following the market practice by buying back loans immediately when they became non-performing. While during the crisis times, when the repayment discipline drops, Buyback can be maintained only from the capital that is freely available. We did so for a brief period of time, and depleted the profits that we had generated earlier, but sooner or later, if the market conditions remain hard – it becomes impossible. As you may have noticed, all P2P platforms are facing the same obstacle – buybacks are disappearing…
How to maximize your profits and get back as much as possible?
I have to appeal to the common sense of all investors by asking what might feel unnatural action for you – please give us time to reorganise our business and maintain the existing level of funds in order to generate sufficient levels of revenues. That means retaining your investments with us! This will allow us in the short run to cover your interest payments and transform our business in order to increase the real value of loan portfolio and match it to the size of the respective liabilities. In the long run, we will be able to correct our strategy by realizing that there are factors beyond our control and that we must build this business with a higher level of risk awareness!
In the case you have any questions about the above, please feel free to contact us.
Looking forward to get through this period stronger together!