Pending payments – everything you wanted to know

25.03.2020

mintosblog

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.

Example

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, although in some cases it has taken longer. The main reason for this 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.

Protecting the interests of both sides 

While pending payments exist because lending companies settle the net payment on a weekly basis, we make sure 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 a penalty fee for late settlements that is shared with investors – which means investors receive 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.

 

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.

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