Visit at tech-savvy Debitum Network in Lithuania – extensive interview with co-founder Martins Liberts – review 2019

Visit at tech-savvy Debitum Network in Lithuania – extensive interview with co-founder Martins Liberts – review 2019

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Debitum Network Review 2019

During my trip to Vilnius in Lithuania a went to visit the Debitum Network office and had a long talk with the co-founder and CEO Martins Liberts. I did not hear about the platform until recently, during the P2P conference in Riga in the start of June 2019. When I started doing research on the company and the Debitum Network platform I quickly discovered that Debitum Network are different in several ways from many other platforms. They seem to be a lot more focused on technology and Debitum Network has a different buyback model than you would usually see. As I have been working many years in the IT sector, I always poke around a bit to see if I can find any clear vulnerabilities and it soon became very clear that security is something Debitum Network has a lot of focus on. So I decided to test the platform out. Below you can see the conversation I had with the Debitum Network co-founder and CEO Martins Liberts. 

The interview with co-founder Martins Liberts

Georg: 
When I did my research on Debitum Network I came across some YouTube videos that were about a year old, about your ICO, Initial Coin Offer, for the Debitum Network token. But when I look at your platform today, there is nothing about the Debitum Network token. Why is that? Did your business model change?

Martins: 
We had the Initial Coin Offer because we thought it would be a good way to fund, but also a way to add something in terms of technology. More transparency. But when we launched the first version last year in September there were a lot more blockchain-related things. You could buy and sell the tokens and things like that. But we realized that we were maybe a little bit too early. We were analyzing what the users were doing on the system and were came to the conclusion that some potential investors got maybe scared or confused with the mix of fiat and cryptocurrency. We decided to remove the cryptocurrency functionality from the user interface, but Debitum Network still use the blockchain technology for the processes in the background. So all of the investments are in fiat currency on Debitum Network

Georg: 
How are you using the blockchain technology at Debitum Network? Are you e.g. using smart contracts? 

Martins: 
We are planning to use smart contracts. E.g. for each scoring event, Debitum Network would put a token in a smart contract. So you could see how many scoring transactions was made on an application. So Debitum wants to create a loan register on the blockchain. Debitum Network thinks this will bring more transparency. On most P2P platforms you put your money there, but you are not really sure what is happening with the money. You have to trust the platform and therefore you trust the data you see on the platform. You can check the rating as well. Some have them, others do not. Right now the economy is good and everything is going great, but when the downturn comes I think you will need different standards for the data transparency. So we are making sure that Debitum Network is ready for that point and has a better technology for that. 

Georg: 
So the Debitum Network platform is fairly new. You published version one in September 2018. 

Martins: 
Yes, that was when we launched the public version. But already from April 2018, we did offline tests with loan originators. They used the platform and we got all the questions out of the way before the public launch. 

Georg: 
I always like to get to know something about the experience in finance and technology of the people behind a platform. Can you tell me a little bit about you in that regards? How did you get to where you are today? 

Martins: 
My own background is two-fold. My Bachelor and Master degrees are all business and finance, but a lot of my work has been in the technological perspective. But it has been connected to finance e.g. working as a technology provider for a financial institution or a fintech. I have 15 years experience in IT. It all started because our IT company lacked finance for growth. We already had agreements to do projects, but we did not have the money yet to hire people to implement the projects. We tried to get financing in the bank, but we were not able to get it. There was some kind of bureaucracy issues. We had to get insurance and pay for some credit checks. The bank said, “just pay for the checks and you will definitely get the money, as you are working with big companies”. Then, in the end, our application was rejected anyway. That made us realize what it means for a small to medium-size company to not have enough cash. So basically, instead of growing our own business, we were forced to sell. That was a really stupid situation. It was either stop growing or sell. That experience led us to partner up with another guy and we then started the first non-bank invoice financing company in the Baltics called Factris, (former DEBIFO), to help the small to medium-size business grow. Last year we exited DEBIFO by the way. But that experience helped us with understanding how to do due diligence with a loan originator to figure out if they are healthy or not. We use that knowledge a lot today at Debitum Network. So 15 years in IT and then 4 to 5 years in finance and actual lending. We combine that experience here at Debitum Network with the other resources from the finance sector. 

The strongest side of Debitum Network is technology. Maybe the first version was not so good in terms of usability and design, but after hiring a designer to improve it, version 2 of Debitum Network is simple and user-friendly. But tech-wise the first version was quite solid as well. We have APIs in place to integrate with loan originators and we can quickly implement new ideas or functionality. We are a bit slower than some other platforms to onboard loan originators because we are really picky and spend a lot of time looking at numbers. Sometimes we use 3 months analyzing before we onboard a loan originator. Even after 3 months we still have questions. I don’t know how someone can only use a few weeks. We need to look into every little thing or number that does not look perfectly ok and then analyze the reason. If you don’t do this in details then it is a game of roulette. But we move very fast on the technology side. The first version was implemented in only 6 months. 

Georg: 
Does Debitum Network still have some connection with Factris

Martins: 
Well, we have some connections still. For example, we still sit in the same office. So Debitum Network shares the office space with Factris. I don’t know if that is good or bad. But moving to separate offices right now would have a big financial impact, as we have signed a lease for a specific period of time. But otherwise, we are quite separated and formal with each other actually. But Debitum Network started with Factris on the platform as a loan originator and we still have them. 

Georg: 
I saw in your whitepaper from the very beginning that Debitum Network wanted 50 countries in a few years. That strategy seems to have changed. 

Martins: 
Yes, Debitum Network has reduced the number somewhat to countries and continents we would like to expand to. The goal for the number of countries was dropped to 15, all located in Europe as we understand that region better. We would like to be well established in our home continent first. If we talk about debt collection for example. How that happens in Europe and how it happens in Asia for example. can be very different. I Europe it is more factual. You have a contract. If the borrower does not pay on time you send out a number of reminders and if the borrower still does not pay, you go to court. In Indonesia for example, we were told that the collection is based also around the concept of shaming. Someone would go to the person, the neighbor or the business and say “that guy owes me money and he did not pay”. Maybe even have a t-shirt or something with similar writing. The culture and the methods used are based on different principles. For example, Debitum Network was talking with some loan originators in Europe that had opened a branch in Mexico. Almost everyone was late with their payments. First, they thought they had lost all the money. Then they found out that it is very common in that culture not to pay back in time. After about 6 months everybody started to pay back the loans and now that branch is very successful. Even countries close by having a lot of differences in the way we do business. I know because I am Latvian and I came here to Lithuania about 9 years ago. Even though they are neighboring countries that share a similar history and we call each other brothers, the way we do business, the procedures and the way we think about business is very different. That is why our goal at Debitum Network now is to onboard 15 loan originators in regions we understand better. 

That is also the reason why Debitum Network try to build it in a decentralized way, in the way that we have a local risk assessor to assess the risk independently. If Debitum Network will somehow move away from buyback or something like that, we will do local debt collection by using local professionals specialized debt collection companies. It is important to have local experts who know the local procedures you have to follow and who knows the legal framework, and the culture and perception about lending. It will be Central and Eastern Europe and Debitum Network are also testing Western Europe and Benelux. We are looking into the Czech Republic, Balkan, Rumania, Bulgaria, Slovakia, Slovenia, Croatia and other countries in that area. Debitum Network has plans to test out Germany and Italy as well. 

Georg: 
You use ratings on Debitum Network to rate loans and companies. How does Debitum Network come to these ratings? 

Martins: 
We are very proud of this because Debitum Network are the only one that use this type of system. In each country we find a risk scorer, that is specializing in risk scoring for that particular market. When the loan is uploaded as a draft it automatically sends the information to the risk scoring company and they then return their credit score. They also include the probability of a default in the next 12 months. For each market this is different. They all use different scales. Some use ABC, some use 1-100, and others 1-1000 and so on. Debitum Network then unify them for the platform. So for investors, the score on our platform for loans mean the same regardless of country. Because we do it differently than some other platforms, we noticed that we sometimes scare investors. Because for example for us, a C rating is only about 5% probability of default, where on other platforms that is usually worse and the percentage is higher. As we grow, Debitum Network will also add more scorers so that a single loan will be scored by several companies. If the score comes back that the loan will most likely default in 12 months, we will of course not allow it on the platform. If the loan originators send to many low rated loans we will also exclude them from the platform. Once per month Debitum Network then sends the same loans back for scoring at the same company, to see what the score is now. Debitum Network also score it again, when and if we reach the first penalty date. So the loan can change score along the way. It could start off as B, then go to B-, and then B+. You can actually see this under the details for the loan. We think that these risk scoring companies are better than the loan originators to score the loans. 

That is also a big fight Debitum Network has with the loan originators. So why is this unified scoring so good? They build their scoring on their historical data and they have a lot of it from all the companies they do scoring for. No loan originators score as many loans as these companies and they are also independent. Loan originators could score maybe 1000 loans per month. These independent companies could score more than 100000. We have never heard of loan originator who scores companies or loans again after they have been rejected. They could reject a company that was actually good, so their scoring model may be tilted. They need to test the company later to see if the rejection was good or not. The two types of scorings are uncomparable. We feel that our approach is way better. Debitum Network don’t want the investors to be confused or even mislead by some loan originators who provide data that is not statistically proven. It also helps to keep loan originators honest in regards to their scoring. 

Georg: 
What kind of different loans do you have on Debitum Network? Is there any collateral? 

Martins: 
Debitum Network has invoice, credit, and trade finance loans. Other than that Debitum Network has regular business loans. That is loans to business with and sometimes without collateral. The collateral could be real estate or some kind of guarantee from shareholders or another company. A bigger company could give collateral to a smaller company. For invoice financing, it is the invoice. For trade financing, it is supplies or actually inventory. Very often in trade financing, it is just financing. For example, a company wants to buy Coca Cola from somewhere and the financing company just finances the deal. They don’t see the bottles, they don’t see where it goes or anything. They just hope that the bottles are sold so they can get their money back from the sales revenues. The company Debitum Network works with is different. So when they, for example, buy Coca Cola they bring it with their own transportation to their own warehouses and they let it out little by little only when the borrower pays a part of the loan. So compared to purely financial it is a much safer model. 

Georg: 
So tell me about your buyback setup. It kicks in after 90 days? 

Martins: 
By default, we have 90 days. But for some, we have a more advanced structure as well. After 90 days it will happen for sure. But for some, Debitum Network have partial buyback along the way. For example, if we see that 45% of the total loans for a company is late we force them to do a partial buyback of the loans that they again go under the limit. That makes us feel more comfortable. It is just really hard to provide that information to investors in a simple manner. Because it differs for the different loan originators. You can actually see under the description of each loan originator if they have advanced buyback

The percentage may be different for each because it depends on the risk of each loan originator. For one it is 45 days buyback for percent 50% of loans. For another, it could be 50 days for 60% of the loans. Investors will then receive the partial buyback amount on their account but will still hold the amount of the loan that has not been bought back. Debitum Network is not pushing for the highest returns for their investors. We are focusing on security and risk mitigation for the our investors. This is the reason why Debitum Network works like this in many ways on our platform. Another thing we do is if there are monthly repayments, say for example a company has 60000 in loans and the repayment is 5000 per month. If we collect only 2000 and the first repayment is due, we repay in full. We do not repay proportionally, we pay them in full. They can choose to go back into the loans in the auto-invest or they can do it manually. That is also a way we protect investors. 

 

Georg: 

Is Debitum Network paying interest when a loan is not current? 

 

Martins: 

You earn interest from the day you get the loan. Debitum Network have a grace period of usually 15 days and for that, you will get the calculated interest. After that, you will get interest and a penalty rate on top. But only if the business will pay back late. If it, on the other hand, will be a buyback you will not get the penalty, but only the calculated interest for all the days. For some, the penalty is a couple of percents, for others, it is around 10 percent on top. We write it as one number than a plus, and then another number in red under the description. Like 10% + 3%. The second number it the penalty rate that will be paid on top. 

 

Georg: 

About security and data, when I created my account I used the wrong password a few times and my account got suspended. I also requested a password reset and you did not send me the password in clear text. I had to go to the Debitum Network platform to reset it. I really like that implementation. It tells me that Debitum Network focuses on platform security. Does Debitum Network have 2-factor verification as well? 

Martins: 

Of course. You just need to go to your account settings and enable 2-factor verification. You are actually forced to enable it before you can do a withdrawal if I remember correctly. Also, no one knows your password. Even our Debitum Network administrators could not look up your password for you. Everything is encrypted. When you enter your password on the Debitum Network platform to log in, it encrypts what you entered and compares it to the encrypted password in the database. It does not compare with your actual password. If the two encrypted strings match, then you are allowed access to your account. All your private data is also encrypted and the documents you submitted to verify your identity is not available for viewing or downloading on the Debitum Network Network platform. We also use Amazon CloudFlare to protect against DDOS attacks. The network is also set up to the database is not accessible from the outside. So if you want to hack it, you need to gain access to the internal network first. We constantly monitor network activity as well for any deviations. We do frequent backups of the data as well. Debitum Network also does not allow withdrawals to other accounts than your deposit account. Even if someone breaks into your account, they will not be able to withdraw your money. If they do a deposit from another account they would still not be able to withdraw your money, as the account will not be in your name. Actually they would not even be allowed to do a deposit from an account that is not in your name. We have worked with financial institutions that have very high standards for security and also for public institutions where they have ethical hackers employed to do penetration tests and test for flaws in our software. So we are used to working with very high standards of security. 

 

Georg: 

How many employees does Debitum Network have inhouse? 

 

Martins: 
We have I think 18 at the moment. Everything IT is inhouse and they are the biggest part of the company. Then we have operations, marketing, and business development. Debitum Network outsource legal and accounting. Legal we outsource in the different lawyers in the local markets. Debitum Network believes that this approach is so much better than just having one big law office for all countries. 

Georg: 
Where is Debitum Network registered as a company? 

Martins: 
We are registered in Latvia, but our main Debitum Network office is located here in Lithuania. Our legal address is in Riga and there is one person sitting there to do back-office work. We chose Latvia due to regulations and Debitum Network is also in the process of getting licensed in Latvia. But as we already had a team of talented tech people here in Lithuania, we built Debitum Network on top of that. They worked together for a long time and they are very efficient. I already worked with our CTO for 6-7 years or more. Debitum Network actually has one guy in Amsterdam as well, working with marketing and one guy in Spain. We do all our work and procedures and descriptions in English, so that is the company language. Debitum Network has been working in an international environment from day 1. 

Georg: 
How is the procedure at Debitum Network when you onboard a new loan originator? 

Martins: 
Debitum Network uses several steps. The first step is screening the new market to see if there are any issues. Then we do a preliminary check if the country would go through the AML procedures. If the beneficiary can go through AML, are there any sanctions and are there politically involved people in the company? If that checks out, then Debitum Network do a deep dive due diligence that consists of 6 blocks. We check how they onboard and check their customers, then we check how they do debt collection, then we check their portfolio and portfolio ratios, then we look at their financial status and reports, then the organisational experience and structure, and lastly what kind of securities are they able to give to the investors at Debitum Network to make sure that they can fulfill their obligations in terms of buyback. We use a balanced scorecard and there are a lot of things to check under each step. There are certain things that give an orange alert and some that give a red alert. If we get just one red alert we will not onboard them, unless they can explain it in a sound and valid manner. Three orange alerts would be the same. Once they are on-boarded Debitum Network does quarterly checks with follow up due diligence to see if anything has changed. Also once a year we ask them to provide proof of who owns the company. They have to provide updated financial statements and updated loan book. Debitum Network run all the ratios on the financial statements again and the same with the loan book. We update the same balanced scorecard. We look into their plans and strategy for the next 6-12 months. If they said 12 months ago that they would double their portfolio and they did not, we will ask additional questions about what happened. Then we update everything and get a new score for the company. If everything looks good, then we move on. If not, we freeze until we feel comfortable. If that cannot happen, we will contractually force them to buyback all loans immediately and stop working with them. Of course, there needs to be a valid reason for us to stop the cooperation or Debitum Network could run into legal issues. 

Georg: 
I can see under details for each loan originator that they have skin-in-the-game?

Martins: 
Yes, but it differs. Debitum Network has a minimum and based on the risk and for the different ratios. Based on the risk that has been indicated in the due diligence scorecard we adapt. For example, if it is a longer-term. So we may over time demand a higher skin-in-the-game if we see that a company is low on cash for example. That is also one of the things that make it harder for us to onboard because we have these special demands. We work in a way that an institutional investor would work. Debitum Network is also a young company with only a little over a year in the market so of course, that is also a problem for some. 

Georg: 
Are you planning to create a mobile app for the Debitum Network platform? 

Martins: 
With our new version of the Debitum Network platform, there is no need for a mobile app in our opinion at the moment. It is a responsive design that works really well on mobile devices. We adapt the design and functionality depending on the screen size. When we grow and if we see demand or benefits we may implement one. One of the benefits could be integration with different payment providers or maybe notifications. On the other hand, regarding notifications, investors have actually asked us to implement functionality to turn notifications of. So we will add notification setting functionality to the Debitum Network platform soon. 

Georg: 
What about statistics? Is that something Debitum Network will add in the near future? 

Martins: 
Yes, that is something we are developing right now. Right now statistics are high level, but Debitum Network is currently developing statistics with more details. Where you invested, what the scores are, what companies, and what products. 

Georg: 
I am glad that you focused on security first. 

Martins: 
We actually had some statistics on the previous version but we could see that not so many people used it. Even if they went to the statistics page they bounced back quite fast. So we prioritized the implementation of the statistics lower in the new version and focused on more important functionality first. But now we are developing it. 

Georg: 
What about a secondary market? 

Martins: 
At the moment we do not plan a secondary market for the main reason that it is viewed as a hurdle by Latvian regulatory for obtaining a license in the future. And as we are currently in the process of obtaining one we have decided not to implement the secondary market. At the same time, we plan to implement a premium feature for loyal users that they will be able to request certain investments to be purchased back. It will be this year hopefully. Debitum Network will also add other premium functionality so you can follow top-performing investors. So you will be able to see how they invest and what loans and companies they invest in. So you could copy their strategy if you wanted. Loyalty could be based on how long you have used the Debitum Network platform. Hopefully, this will also come this year. 

Georg: 
A lot of investors worry about what will happen to the P2P industry when we see a new financial crisis. What do you imagine the impact will be on the industry? 

Martins: 
I think for Debitum Network as a platform it will be really good compared to some others because Debitum Network takes care of risk more than some other platforms. So I have reasons to believe that when a crisis hits we will have more things in place that would decrease the risk. Looking into the business where investors are matched with borrowers if you don’t think about a potential crisis then you are taking a lot of risk. When business is booming, everything goes well and you get your money back. I think most of the market right now is designed only for a good scenario. Some of the companies we try to onboard have also talked to other platforms. When they see our due diligence process and what we demand of them they are surprised. They tell us that other companies are happy with way less. So I think that a lot of the companies in this industry are designed for a growing economy. I think some platforms will loose loan originators and some will close down their business. So we are trying to built the Debitum Network platform and our technology in a way, that we can see the bad times coming and survive the bad times. I don’t think that crowdlending should be the only thing an investor should invest in. When I will see on the Debitum Network platform that scores of loans start dropping on our monthly monitor, that is it. I already know that the crisis will come. 

Then you can as an investor make decisions on what to do. All investments, wherever you invest can result in you losing the money. Even if you buy bonds. So investors should not invest money that they cannot afford to lose. You also need to diversify in terms of what you invest in. You also need to be able to cash out because during a crisis cash is king. It is the best time to hold cash as everything is on sale. It all started after the last crisis as responsible banks pulled back. So I don’t think all the platforms and loan originators will survive a different economy. I think the only question is, will the industry survive? If it will take too much of a hit most people will exit and it may only bounce back after several years. But I am happy to see that some platforms are beginning to focus more on risk management than just attracting money and investors by for example offering larger interest rates. Some platforms also promise high returns but the actual return is much lower. I can say you are the first person who has asked such a question and I really appreciate it. A lot of investors just look at the returns but they don’t really look into the company and what goes on behind. The industry right now reminds me in a way of the crypto ICO boom a few years back. There was a lot of publishers who did not care to look into things and do research but they would just recommend anything and collected the money. Just give me 1000 euros and I will say anything. Some influencers would just recommend something without even trying to understand themselves what it was all about. On some level, it feels really similar. You are the first publisher who asked questions about what will happen if things turn bad. Most don’t care. Most ask “what percentage do you offer?” and then they say “that is too low”. That brings back memories. It was the same. For the crypto guys, 10 percent per year was nothing. They wanted 100 percent per month. Risk assessment is not used that much in marketing. So I really hope some companies in the industry will start focusing more on risk and do more and stricter due diligence. That they will do a more careful risk assessment. That is also why I really hope for more regulations. 

Final thoughs about Debitum.Network

I started using Debitum Network a couple of months ago and I really like their new version 2 of the  interface. Debitum Network is a very intuitive website. They have 2-factor verification login, quick and easy verification and the transfer via Revolut was record fast. 1½ hour from I made the transfer until the money was on my account at Debitum Network. Impressive! I really like the Debitum Network advanced buyback strategy and the fact that Debitum Network focus so much on security. However they are still a very new platform with a little over a year in operations. So Debitum Network still has a lot to prove! I will not be putting in too much money until I have used the Debitum Network platform a bit longer and they have a longer track record. 

On an interesting side note, the new CMO of Debitum Network, Gerda Striskaite-Greice, who is also the former Peerberry CMO sent out this email on the 14th of August 2019: 

This week, some P2P marketplaces were affected by issues which made an impact on a significant part of the P2P community. A short update: some P2P marketplaces have suspended the repayments and buybacks from Aforti Finance, the Polish loan originator, as they overdue transfers of borrowers’ payments to these marketplaces. 

As you probably know, Debitum Network did list Aforti Finance’s assets on the marketplace too. However, on the 25th of July, all Aforti Finance’s assets were removed from Debitum Network, and the entire invested amount plus due interest were bought back. It is important to note, Aforti Finance made repayments as had been agreed upon, we have come to this decision as a result of a thorough investigation of their financial situation while doing the 1st and 2nd quarter follow-up due diligence process. Debitum Network decided not to wait until investors possibly got stuck with unpaid repayments and nervously wait for the situation to resolve itself. We wanted to protect investors’ funds and decided to act proactively. It seemed the only right way for us, and I am truly proud of it.” 

Share the knowledge, your opinion and get answers to your questions​

Have you already invested with Debitum Network? What do you think of the platform? What do you think of the advanced buyback model? Are you thinking about signing up? Have you invested in other platforms? Please leave a comment or any question you have below. If you know someone who would like to get started investing or is already investing, feel free to share using the social media sharing buttons below. 

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