Borrowing system without banks
There’s an investing and borrowing revolution about to begin.
It’s called peer-to-peer lending, or P2P (how financial services loves their acronyms).
P2P businesses operate online allowing people to make personal loans to other people, cutting out the bank.
They bring borrowers ( who have been identity and credit checked and rated) together with investors with money to lend.
Borrowers can’t see the identities of the people they are borrowing money from and lenders can’t see the names of the borrowers.
The investors don’t lend all their money to one person anyway.
They tend to split invest in a portfolio of loans.
A person deciding to invest $2500 through a P2P lender can split their money over, say, 100 investments of $25 in loans to 100 different borrowers, reducing the impact of any loans which are not repaid.
On each of those loans there will be dozens of other investors lending little slugs of $25.
That means a borrower taking a $5000 loan may be effectively borrowing from 200 different people. P2Ps compete with the banks which have expensive brick and mortar branches to operate.
P2P lenders’ lower costs should mean lower interest rates for borrowers, and higher returns for investors.
That’s the theory and it seems to be working overseas, though we won’t know exactly how it will pan out here until the P2P industry gets into full swing.
Rather depressingly, New Zealand is among the last of the developed countries to get P2P.
A world map compiled by London investment banking operation Liberum Capital shows P2P’s footprint around the globe.
Liberum didn’t even bother to put New Zealand on that map.
But we are within a couple of weeks of our first launch, which will be a P2P service called Harmoney.
Others are preparing to launch, so the wait for the revolution isn’t long.
The reason for our delay was the failure of the finance companies.
That horrible debacle resulted in a massive rewrite of financial sector laws and P2P laws and regulations were delayed.
It’s a sharp contrast to other countries such as Britain where P2P has been championed by the government which is heartily sick of big banks and rather likes the idea of them losing their stranglehold on lending.
But will it be the revolution I said it was at the start of this column?
One of the great truths of life is that the more that changes, the more that stays the same.
Investors still look for returns and borrowers still look for loans.
The loans that will be made through P2P services will still be ordinary personal loans for people to buy cars, go on holiday, get a new carpet, buy a motorbike, get a nose job, fix their rotten teeth etc.
They are just being delivered through a new business model.
Savers are still lending their money through an intermediary for a return and they must still weigh up the risks of doing so. Nothing new there.
Borrowers still need to borrow wisely and weigh up the risks of doing it, even if the debt proves to be cheaper. Nothing new there, either. In most senses then, P2P is not revolutionary, it is evolutionary. In time, many of us will borrow or invest through P2P.
It’s up to each of us to do that wisely.