Hello everyone. I welcome all of you to the fourth article in the series. In the last newsletter we discussed how FINTECH has disrupted financial markets.
In this article let’s discuss how lending and borrowing has changed with the technology.
Traditional way of Financing.
If you are need of some money which you don’t have at the moment, what would you do? For an example, you are planning to start a new business, you want to buy a vehicle, you have some medical emergency, you want to finance your higher education or you want to buy a property. It’s unlikely you can finance these requirements from your savings. So you will go to a bank or finance institution and apply for a loan. The bank will evaluate your requirement, your credit worthiness, your income, your credit history etc. and decide whether to give the money you require or not. They will of course charge interest and you have to stick to the re-payment plan given to you.
This process may take few days to few months depending on your requirement, your credit history and your relationship with the bank.
The 2008 financial crash resulted in a constriction of the global credit market. Financial Regulations imposed by the government made it harder for both individuals and companies to gain access to loans. Banks were reluctant to issue loans and increased their interest rates. These factors resulted in the massive growth in the peer to peer lending industry.
What is Peer to Peer Lending?
Peer to Peer Lending is a technological innovation, which allows an online platform to connect lenders and borrowers directly. The lenders are the investors who have money. Borrowers are the people with various financial requirements. Investors have the option to select a borrower based on their credit worthiness and the ability to repay. Borrowers can present their projects and ideas to find an investor. These online platforms have a way of calculating the credit worthiness of each borrower. They use various information gathered from various sources with the use of technology. This helps the investors to make calculated decisions.
Peer to Peer Lending is available for personal loans, small business loans, student loans, real estate loans and venture capital funding.
Benefits of Peer to Peer Lending
- Even borrowers whose applications may not have been approved by a bank are able to access loans.
- The application process has been simplified by the online platforms.
- Interest rates are more competitive than what is offered by banks and financial institutions.
- Investors are allowed to personally connect with the borrowers and fund projects they feel worthwhile.
- Investors receive a higher rate of return and it allows investors to build a diversified investment portfolio.
- Borrowers do not have to stick to a rigid repayment terms or a period. Some platforms even offer borrowing for a day.
- A loan can be obtained quickly (within a matter of minutes) and it can be also be a very small amount (Maybe Rs.10,000/-) which is not accommodated by financial institutions.
There are challenges as well
- Finding creditworthy borrowers.
- Insufficient funding to service the number of requests from borrowers.
- Regulatory restrictions
- How to deal with underlying assets when a loan defaults.
Online Peer to Peer Lending platforms are still working on overcoming these issues. They are using technology to calculate the creditworthiness of borrowers by collecting information and processing those using big data, AI and Internet of Things (IOT). They are looking for options to work hand in hand with banks and financial institutions to ensure sufficient funding and to overcome regulatory restrictions. This is a win win situation for both banks and FINTECHs as the banks get to serve a new segment of customers while FINTECHs get access to funding and regulatory clearance.
Few Examples of Peer to Peer Lending Platforms
- Helios https://www.heliosp2p.com/ – In Sri Lanka
- SoFi https://www.sofi.com/ – In USA
- Zopa https://www.zopa.com/ – In UK
- Lending Club https://www.lendingclub.com/ – In USA
- ThinCats https://www.thincats.com/ – In UK
I request you to visit these websites and get an idea about how Peer to Peer Lending works. Please contact me if you have any questions or if you like add some thoughts. Let’s discuss more about how FINTECH companies have disrupted personal and business financing in the next article.