(Bloomberg) --
Struggling to find a bank that would help fund his studies at Insead in Paris seven years ago, Martins Sulte stumbled instead upon a website matching borrowers with a vast database of creditors.
It was the Latvian MBA student’s first taste of what’s become known as peer-to-peer lending, and an idea that stuck with him as he completed his degree and returned home.
The concept has also caught the eye of savers fed up in a world of ultra-low interest rates. Fast-growing peer-to-peer platforms, especially popular in the U.S. and the U.K., frequently offer returns exceeding 10%, though questions swirl around regulation, fraud and how the young industry would perform in a financial crisis.
Zip forward to 2020 and Sulte heads the European Union’s biggest P2P firm -- Mintos Marketplace AS, which he founded in 2015 and which controlled two-fifths of the bloc’s 6.4 billion-euro ($7 billion) market last year, according to U.K.-based researchers Brismo.
Startups in neighboring Estonia and Lithuania have also got in on the act -- to the extent that companies in the Baltic region comprise 25 of the EU’s biggest 47, ranked by industry website p2pmarketdata.com.
How did a region most recently associated with a spate of money-laundering scandals and home to less than 1.5% of the EU’s population come to gain such a foothold in this niche industry?
Sulte, 34, puts it down innovation and moving quickly.
“A wave of financial technology started,” he said in an interview in Riga. “In Europe, there wasn’t really a serious player.”
In many ways, the Baltic countries -- all EU and eurozone members -- are ideally suited for financial-technology firms. Estonia, the birthplace of Skype, has long touted its e-governance prowess. Lithuania has positioned itself as a post-Brexit gateway to the EU for fintech startups.
But there’s more to it than that.
One huge factor is Brexit itself, which removed U.K.-based heavyweights from the EU rankings. London-based Funding Circle has lent the equivalent of $7.6 billion to British companies.
Another factor is regulation.
While the U.K. was quick to pass crowdfunding legislation, only Lithuania among the Baltic countries adopted a similar approach, in 2016. EU-wide rules governing the industry are only now in the works.
“The free approach was more favorable for faster growth,” said Jekaterina Govina, head of supervision at Lithuania’s central bank. “It’s always easier to develop a business when there’s no state involvement, no inspection behind your back supervising or demanding permits.”
Peer-to-peer growth in Lithuania is “more sustainable than in countries that don’t have regulatory regimes,” according to Govina.
Clients lending through Mintos are based mainly in western Europe, with Germany among its biggest markets. Routed by its IT hub in Riga, their cash can purchase loans from related- or third-party credit providers in as many as 30 countries -- as far afield as Indonesia and Botswana.
That exotic-sounding journey may scare some lenders -- especially when packages offered by originators can include payday loans and carry interest rates of as much as 5000%.
But even in typically conservative Germany there’s booming demand.
Timo Walther, a 29-year-old software engineer in Berlin, has invested 5% of his savings through peer-to-peer platforms, including Mintos. He was impressed by its tech savvy and geographic reach, though in a country where savers slam the European Central Bank’s enduringly low interest rates, his decision came down largely to superior payouts.
“I started using it mainly because it had incredible returns,” Walther said. “I also invest in stocks, but stocks don’t give you 12% just like that. If a loan originator goes bankrupt, it’s not so bad.”
A big gripe against the industry worldwide is that its stability hasn’t been tested by an economic downturn. But other issues have cropped up, including in the Baltics.
Estonia opened fraud probes in January after two crowdfunding websites went down and thousands of investors -- mainly foreign -- were unable to withdraw their cash. Police said the chances of recovering the money invested were small, but called platforms in general trustworthy.
That case was relatively small: about 40 million euros in total. But Estonia and Latvia have suffered significant reputational damage from much bigger dirty-cash scandals in recent years. Estonia’s Finance Ministry has urged more investor caution with regard to crowdfunding and is preparing to license such firms.
Other parts of the world have experienced difficulties. Chinese police last year froze about $1.5 billion worth of assets across more than 380 peer-to-peer lenders in an illicit-financing investigation. An operation spanning 16 countries and regions including Thailand and Cambodia brought 62 arrests.
To be sure, even without specific regulation, Estonia boasts an in-depth code of best practices, according to Tania Ziegler, a senior researcher with the Cambridge Centre for Alternative Finance.
“This sort of rule-setting has created a level of confidence and professionalism in the region,” she said.
For Mintos’s Sulte, business is booming and trust is key to maintaining growth.
“Our goal at the end of the day is to make loans an acceptable asset class where a retail investor can invest,” he said.
©2020 Bloomberg L.P.
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