Bor­row­ing sys­tem with­out banks

Auckland City Harbour News - - OPINION -

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.

Newspapers in English

Newspapers from New Zealand

© PressReader. All rights reserved.