Pros and cons of auctions in crowdlending marketplaces

Image result for crowdlendingWith the new financial technologies included within the Fintech sector such as crowd equity, crowdlending … new concepts arise that involve procedures for managing operations that constitute a very important section within said financial activities. This section is the constitution of a marketplace where investors can see the operations that are available to invest at any time. These marketplaces may have an auction system or, on the contrary, be a direct investment system.

To understand this concept well, in this post we discuss the functioning of a marketplace, the advantages of its use, a difference of types … everything below.

What is a marketplace?

Image result for marketplace financeThe marketplace is created as a space or place in the online medium in which bidders and claimants are allowed to maintain a relationship in order to carry out a commercial, financial transaction … It acts as an intermediary since it offers the plaintiffs all the range of products or information of the operations that constitute them, facilitating the work of the bidders and guaranteeing the security of the transaction that is made.

That is to say, in the platforms of participative financing, it is the place where the investors choose which company to lend their money and therefore, it is where the companies expose their financial needs.

Types of marketplace

It is necessary to clarify that there are two types of the marketplace:

  • The generalists, who publish a great diversity of products.
  • The specialized ones, who work in a specific sector.

An example of a generalist would be Amazon, eBay … and specialized in the marketplace of financing platforms.

In addition, another division of the marketplace is:

  • Auction Marketplace
  • Investment Marketplace or direct purchase

What is the auction marketplace?

Therefore the marketplace of crowdlending, crowd equity … is considered the place or space enabled within the site or web page to hang the different financing operations with all the necessary and important information for investors. In this way, they can choose which of them to deposit or invest their money.

In this place called “mercado” in Spanish, the offeror is the different companies that request loans through the platform that manages the financing process, and the plaintiffs are the investors that seek to make their money profitably.

The auction mode within the marketplace favors investors who lower the interest rate more, that is, investors will lend their money to the company, even after the amount is completed and investors who have lowered the interest rate the most they will be those that finally enter to participate in the loan, leaving out all the others.

On the other hand, indirect investment marketplaces, they will participate or invest in loans in chronological order until the amount is completed, that is, if a company requests € 100,000, investors will lend their money to complete that amount and at that moment the loan closes. Therefore, in this modality, the investor from the moment he requests to invest will know that he will participate without having to wait at the end. Likewise, many platforms, such as MytripleA, allow investors to lower the interest rate in favor of SMEs.


Image result for auction

Let’s see the example with illustrations of our marketplace and thus understand the auction investment process better.

Once in the file of an application we indicate what amount we want to invest and what type. What does this mean?

The investor will choose the amount he wants to invest in contributing to the financing of the company and the rate at which he will do it. Regarding the type, there is a nuanced and that is that there are two options:

  • Invest at the maximum rate: which corresponds to the maximum rate indicated 4.50% + Euribor in the example.
  • Support the SME: what it means to reduce the interest rate to which I lend the money below 4.50% + Euribor. You can never lend to a higher than stipulated type as a maximum.

If you choose to support the SME and lower the rate to, for example 4% + Euribor, in the investment system for auctions you enter a priority list at the close of the operation which means, that the operation can remain open a maximum of 21 days according to the Law and once the loan amount is completed, the platform performs a “macheo” among all the investors that have participated giving priority to those who have lowered the interest rate. Therefore, the investors that finally invest the loan will be those that have most supported the SME or whose interest rate on which they put the money in the operation, be lower.

So while the operation is open (maximum 21 days) and although it is 100% complete, investors can continue entering and indicate the amount they want to allocate to the funding of the operation since it will only be when the employer decides to close their operation or at the end of the 21-day period, when the final investors investing in the loan are determined based on the minimum interest rate criterion.

One of the problems of the auction system is the uncertainty that creates the investor since he does not know if he finally invests or not in the operation until the end.

Investment Marketplace or direct purchase

This type of investment is what we use in MytripleA. The operation is completely the same but there is no interest rate criterion. The investor that decides to invest in an operation may do so at the maximum rate knowing from that moment that the investment operation will be effective, that is, it will end up entering the operation.

Once the 100% is reached, the amount requested closes the loan, not giving an option for more savers or more funds that are actually needed to cover the loan.

In this way, the company obtains the loan more quickly and investors know from the moment of the request that they will finally participate in the loan- i thought about this.

Keep in mind that the last word is the employer, and can occur in the case you decide not to sign the loan. In this case, the investors will recover the total of the money invested immediately remaining available in their panel to be able to invest it in another operation.

Another advantage of the direct investment system is that the investment is easier to understand and realize since only with registering, indicate the amount destined to the funding of the loan and the type (maximum or inferior), the investment is yours.

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