Update (August 21, 2020): We added clarification how the settlement payments received from lending companies are allocated to investors.
In a perfect world, money could be moved in moments and investors would receive their repayments instantly. Unfortunately, international financial systems are not yet fully globalized, and smooth, instant settlement¹ is not always possible for multiple reasons. In simple terms, money transfers – especially international transfers – take time, hence the payment becomes pending. But what does this mean exactly, and why is your money sometimes “on hold” for several days?
Pending payments are necessary
Mintos is a marketplace for investing in loans. Our business is connecting investors looking to invest in loans on the one side, and lending companies that are looking to fund the loans they have issued to their borrowers on the other. That leads to money having to be moved between separate parties, mostly internationally, and all of this can’t happen instantly. This is where pending payments come into play.
Pending payments represent money that is in the process of being credited to the investor’s account. They happen when the lending company informs us via API² that a borrower has made a payment. At that point, we only have the notice that a transfer is coming, while we wait for the lending company to actually transfer the money to us. We’ll credit the money to the investors as soon as it arrives.
Money transfers take time (unfortunately)
There are 2 transactional flows between Mintos and our lending companies.
1. When an investor makes an investment, we receive the money and send it to the lending company.
2. When a borrower makes a repayment, the lending company receives the money and transfers it to us.
The current financial setup makes it very inefficient and costly to transfer each payment individually. Instead, these 2 money flows are settled in weekly batches. Investments and repayments are offset against each other, and only the difference is transferred. It’s worth noting that this settlement system applies in both directions – the lending company will also receive the invested amount on the settlement date, so the system works out fairly for both sides. That said, we’re working on improving the process.
Pending payments release
Under normal market conditions, outstanding investments on Mintos were increasing. In other words, there were more investments in loans than repayments over a settlement period. So while there were some pending payments, these were offset against investments flowing from the Mintos side to the lending companies. In many cases, pending payments could be released immediately, if the accumulated settlement was already in plus digits for the period (i.e. new investments exceeding repayments), which it was – hence many investors didn’t see any pending payments.
When investor demand decreases – as is currently happening due to global events – or a lending company stops offering new loans, there are more borrower repayments than new investments in loans. In this situation, lending companies need to make net transfers to Mintos investors. That means, for some of the pending payments we need to wait until we receive the money from the lending company, hence pending payments have become more noticeable.
Day 1 – investments of 1000 €, borrower repayments of 4000 € –> 1000 € are released to investors and 3000 € go to pending payments and wait for settlement day
Day 2 – investments of 2000 €, borrower repayments of 3000 € –> 1000 € goes to pending payments, and total pending is 4000 €
Day 3 – investments of 5000 €, borrower repayments of 2000 € -> 3000 € pending payments are released to investors, pending payments balance is 1000 €.
Day 4, 5, 6, 7 -> the same dynamics
At the end of day 7 we do the settlement with the lending company. We check if we have to transfer money to the lending company, or they have to transfer to us. If the lending company has to transfer to us, the money may take a few days to arrive. Once it does, we release the remaining pending payments to investors.
The average pending payments period is currently 8 days (as of 25th March), although in some cases it has taken longer. The main reason for pending payments is the settlement period with the lending companies, and the time needed to transfer the money (which can add several days for some countries). Investors can see the pending payment amounts for each lending company on the Statistics page and on our pending payments dashboard here.
Protecting the interests of both sides
While pending payments exist because lending companies settle the net payment on a weekly basis, we do take measures to ensure the system is not being abused. The moment the settlement is late or pending payments are increasing, our team is in contact with the lending company to investigate why – and we’ll take action where necessary. We also impose sanctions for late settlements – which results in investors receiving interest on pending payments. Last but not least, lending companies understand very well that investors vote with their wallets and will do whatever they can to keep their trust.
Like any funds of investors or lending companies, pending payments are segregated from Mintos’s own funds, and they are not related to Mintos’s liquidity. Loan repayments become pending when we are informed by the lending company via API that a repayment has been made by the borrower. At this point, the money still needs to be transferred to Mintos. Disbursements to investors are carried out automatically as soon as we receive the money, or when new investments in loans from that lending company exceed the repayments by borrowers.
Pending payments are different from grace period
Pending payments are different from grace periods. A grace period is a set number of days after the due date during which payment may be made by the borrower without penalty. On the other hand, pending payments refers to the time investors wait for the lending company to transfer repayments.
How settlement payments are allocated to investors
Settlement payments received from lending companies are allocated according to section 10.5 of the Mintos User Agreement in the following order:
1. Contractual fees that are due from the lending company to Mintos
2. If Mintos (or a third party assigned by Mintos) has taken over servicing of the loans from the lending company, servicing fee or fees for enforcing contractual rights in and out of court
3. Reimbursement of reasonable costs incurred to protect investors’ interests, including legal fees or costs for other actions aimed at recovering investors’ funds
4. Payments due to investors, including borrower repayments on principal and interest, repurchase prices, and buyback prices. These payments are assigned in the order determined by the assignment agreement and generally follow a chronological order from the oldest to the newest due.
5. If the lending company is 14 days late in making payments to Mintos, or another period that Mintos finds material, Mintos may decide that payments due to investors as buyback prices are allocated after other payments according to point 4 above.
6. Payments of late interest on pending payments due to investors
7. Payments of any late interest or penalty fee due to Mintos
If due to requirements of law we would be required to apply a different order, we will do so.
¹ Settlement here refers to the transfer of the money to complete the transaction.
² API stands for Application Programming Interface. It is a way for two software applications to communicate with each other.