Platform risk refers to the likelihood that a p2p platform may go bankrupt, resulting in the loss of lender’s money held on the platform. Because p2p platforms are currently not regulated and do not disclose their financials, it is difficult for lenders to assess platform risk. To mitigate platform risk, lenders can do regular cash transfers or use a platform with an escrow agent.
Where does the money reside?
In a typical p2p setting, the un-deployed cash from borrowers and lenders are held at the platform company. Although this could be on separate bank accounts, there is still the possibility of the platform company using lender’s cash for its own operations. Also, if the platform company goes bankrupt, the lenders’ cash may be subject to claims by all creditors of the p2p platform.
Minimize your undeployed cash held at the platform
One way for lenders to manage platform risk is to transfer excess undeployed cash back to the lenders’ bank accounts. However, this method is cumbersome because lenders need to monitor monthly cashflows closely and plan out how much cash to keep at the platform to participate in future loan opportunities.
Escrow Agent helps reduce platform risk
An escrow agent is an independent party that manages cash-flows between borrowers, lenders and the p2p platform according to the terms and conditions agreed by all parties. The cash that the escrow agent holds are legally segregated from the accounts of the p2p platform. In other words, the platform company can’t touch the lender’s money. This helps protect lenders’ money if the platform company goes bankrupt.
Don’t confuse platform risk with borrower risk
Finally, it is important not to confuse borrower risk with platform risk. Having an escrow agent will not reduce borrower risk. These are two different risks. To mitigate against platform risk, lenders can do regular cash transfer or use a platform that has an escrow agent. To mitigate against borrower risk, lenders should focus on understanding the borrower’s risk profile and the platform’s underwriting ability.