Transparency has always been key for MYC4. It was therefore with a heavy heart that I saw investors speculating on the Forum that MYC4 has a hidden income from foreign exchange transactions related to money transfers on the platform. I realised, however, that we at MYC4 have not been good at communicating exactly how the money flows from investors to borrowers – and back again. This blog post is therefore dedicated to those of you who find this aspect of our model interesting.
The first thing to emphasise is that the money follows the transactions on the MYC4 platform. Essentially it means that the funds for a particular loan will be transferred to the provider once that loan has been successfully funded by investors. The borrower is now called to sign the relevant documentation and receive the loan. Similarly, repayments are entered in the MYC4 system for each loan as the borrowers repay, and that money is then transferred back to MYC4. After receipt of the funds, MYC4 distributes the money to the relevant investor accounts. The investors now have money to bid on new loans and so the cycle starts again.
So the money is being transferred back and forth again and again? you might ask. The answer is yes. But why?
There are several reasons why we have decided to use this setup, the most important one being control. In our early days, we would net out the money flows with our loan providers in the sense that a net transfer amount would be sent one way, i.e. if a provider’s disbursements exceeded its repayments, MYC4 would transfer funds to the provider, and vice versa. What we came to realise was that MYC4 was almost always the one who ended up paying; the providers’ loan portfolios were growing and the net flows therefore favoured disbursements over repayments. This is not necessarily a bad thing. It turned out though that it created an expectation with some of our providers at the time that they were recipients of funds, not senders. This, however, is necessarily a bad thing. By insisting that all providers transfer the outstanding repayments before any disbursement is approved, we now have a greater sense of control with the money flows and the providers get accustomed and incentivised to paying us on a weekly basis.
It is very important that our providers are comfortable working with MYC4 and that the partnership is beneficial to their institutional capacity and growth. We therefore insist that only repayments received from borrowers should be transferred to MYC4 in order to avoid putting strain on the institutions’ liquidity position and to make it possible for us to monitor the quality of the loan portfolio. This also forms one of the components of the bi-annual spot checks. Finally, as a result of loan disbursements being contingent on timely receipt of loan repayments, we are able to detect early on if and when a MYC4 provider is having liquidity problems or potentially lack good accounting practices, i.e. funds earmarked for disbursements will not as easily be “recycled as repayments”.
MYC4 has been outsourcing the core operations in this area to INTL Global Currencies Ltd (IGC) since 2009. IGC handles all money transfers to and from the providers and offers the foreign exchange (FOREX) services required to convert the funds from euro to local currencies back to euro. In this setup, IGC is compensated by a foreign exchange spread on the transactions as well as a quarterly service fee paid by MYC4. Here it is worth noting that IGC uses real time rates which is why rates on the MYC4 platform may differ even within the same day.
It should be no secret that this model can – and should – be improved in several ways; most notably by finding a good way to net out funds to reduce transaction costs, and by obtaining a better FOREX spread than MYC4’s current size and volume warrant. Also, as experienced MYC4 investors will know, related and repeated discussions have focused on building hedging, multi-currency ability, and south-south investment. It is not possible to say at this point if, when, or how such improvements will be implemented.