The Baltics phenomenon for fast-growing investment platforms
The fintech evolution has been a game changer for the investing industry. Two decades ago, investing was accessible to the wealthy as a means to make them even wealthier. But with the development of the Internet and technological innovations, the rise of digital information paved the way for more available investing opportunities.
The early 2000s mark the foundation of the peer to peer (P2P) lending industry that started to shape the way we currently see investing for individuals. Zopa was a P2P lending pioneer that was the first offering to connect borrowers looking for personal loans with individual lenders willing to lend money through an online platform. It was followed by the rise of Lending Club, which later triggered the outspread of P2P investments, breaking down the existing barriers and democratizing investments for individuals.
Twenty years fast forward, peer-to-peer investment platforms connecting individual borrowers and lenders are booming across the globe. Such a lending model offered benefits for both sides: for borrowers loans became more accessible than those offered by traditional banks. On the other hand, investors had the opportunity to earn higher returns on their investments compared to traditional savings or investment vehicles.
In Europe alone, it is projected that P2P lending market size will reach 78,115 million USD by 2028, growing at a compound annual growth rate (CAGR) of 25.27% (Source). Currently there are nearly 160 P2P lending platforms operating in Europe (Source), with the Baltics region leading the market, occupying the largest share of the market (Source).
As the industry evolves rapidly, an effective and supportive regulatory environment must be followed to foster the growth of investment platforms while safeguarding investors. Two years ago, Latvian regulatory authorities together with leading industry representatives created a framework for licensing such platforms. Thus, platforms became financial institutions that can issue financial instruments – Asset-Backed Securities (ABS). As a result, six investment platforms are licensed in Latvia so far, with Nectaro becoming the latest to receive an Investment Brokerage Firm License issued by the Bank of Latvia (Latvijas Banka).
It is crucial that the protective mechanisms and nuances of regulation differ quite significantly in each country, reflecting different approaches of governments while protecting all participants interacting in this industry (Source). But having such a license and a regulatory framework that service providers need to follow provides investors with greater confidence and protection in the long-term. As today's investors become more educated, it is predicted that in the foreseeable future, investors will contemplate only regulated platforms as viable investment alternatives.
The profile of modern investor changes
When democratization of investing happened, making services simpler and available to more people, individuals were overwhelmed with all the options out there. As the generations changed, by which I mean Millennials and Generation Z, they drastically shifted their priorities and lead different lifestyles than previous generations. They want to work smarter, do not expect to receive pensions and other types of state support in their old age, so they focus earlier on understanding and improving their financial situation.
To become more independent and have more time for self-development, Millennials and Generation Z focuses on various passive income opportunities, with investments becoming an integral part. For example, if the median age for when Millennials start investing is around 25, Gen Z is even further ahead of previous generations, starting to invest for their future at the median age of 19 (Source). As peer-to-peer investment platforms are easy to understand, and offer low entering costs, they are more attractive to young investors.
At the same time, as access to information and various investment options is so fast and easy, the lack of understanding of the basics of finance might plunge young investors to riskier investments and hasty decisions. The desire to make money quickly and fear of missing a popular trend at the moment (FOMO effect) can lead to unreliable financial service providers and rash choices.
Freedom of decision making does not relieve anyone from responsibility for their decisions. Investing demands a thoughtful approach not to fall into pitfalls of financial loss. Financial knowledge is the backbone for smart decision making and includes clear financial goals, assessing risk tolerance, creating a diversified investment portfolio, choosing regulated platforms and being aware of investment taxes policy in your country.
As the landscape of finance and investing is constantly changing, it is not only the responsibility of young investors to act on their financial knowledge, but it is important for the industry to promote financial literacy programs and resources specifically tailored to younger generations. This is also our goal at Nectaro – to educate the investor by providing diverse and understandable content about investment types and how investment works in general.
Diversification of your life can diversify your wealth
The saying “if you don't invest, you lose" is true, especially in today's constantly changing economic environment, where the value of money is decreasing every day, primarily due to phenomena such as inflation. Therefore, investing becomes imperative for money to increase its worth. The essence of investing is doing it wisely and based on your knowledge, meaning that before you start your investment journey, your risk appetite, desired profits, reliable partner, and diverse investment portfolio have been thought out.
The concept of diversification actually can be extended to life decisions in general – by having the right mindset and behavior about your life choices, you might also benefit from decisions connected to financial outcomes. When thinking about what else I can do to diversify my income and work on my wealth, people most probably come down to investing. That’s why investment platforms will become an integral part of the financial landscape for new generations in the present and the future. Although everyone should keep in mind that the basic activity of investing does not 100% determine whether you are going to be wealthy or not – every investment, regardless of its volume, carries risk, be ready for that.
Sigita Kotlere, CEO and Board Member of Nectaro, a fully licensed investment platform www.nectaro.eu