Lending (and Borrowing) Culture

One of the most interesting innovations or variation from status-quo during the last decade has been peer-to-peer (P2P) lending and the use of technology. The area of interest obviously is the use of technology, the regulatory concepts and ‘selling or securitisation’ of the loans. P2P loans are centuries old when people have borrowed money, paid interest at the same time submitted a collateral. The only thing that has conceptually changed is the use of technology.

Cumulatively, lending as a Fintech start-up segment has attracted close to US $20billion in consumer ($12b) and business ($8b) lending. This is a total of close to 350 companies as of Q1 2016, add to this Equity Financing and Crowdfunding, we are looking at over 500 start-ups out of 1400 in the Fintech space. This is not much considering the idea is to offer variety, choice and ease in the process and disrupt banking. What makes it interesting is the geographic dispersion and local nuance to the offering.

Buying a house, a car, piece of land, spending on a wedding, buying jewellery in some cultures this is all accomplished by spending the money one has. The idea of living within the means and saving to afford luxuries of life is a cultural aspect. In countries like India till a couple of decades ago 30-year mortgages were unheard of where as at the same time in developed countries of the West having a mortgage and being able to pay for it was a sign of prosperity.

In the UK, till a few years ago you could borrow close to 4-5 times your income to buy a property without paying a penny in downpayment or deposit. If you just think this at a very conceptual level, if people continued to borrow for everything and a few defaulted nothing would happen. When many default, it will move the needle and suddenly a domino effect will come into play. This was or is known as Subprime crisis. Not difficult to understand that we have the brewing of the same albeit in a minuscule fashion.

Culturally, many countries in the West remained where they were pre-2008 from a Lending and Borrowing perspective. Just the methods changed. P2P lending was invented. It is called a service where technology matches the borrower to the lender. Some businesses do this match-making with collateral and some without but the central idea revolves around building credibility of the borrower rather the borrower building credibility on the system. The liquidity suppliers have changed but the borrowers are by and large remain the same.

What has also changed is the involvement of banks which is a cultural shift as the banks no longer control the phenomenon of yield. Traditional methods have found new roads but some things are going back to where we were burnt once.

Kadhim Shubber of FT pointed out in in early 2016 – what started out as P2P has become deeply inmeshed in the machinery of Wall Street and ended the same post by asking a good way to get perspective on fintech is to see what happens when the capital markets are asked to buy the hype. Three things have happened since, Funding Circle becoming the first P2P lender to have loan securitised, LendingClub CEO resigns over ‘control deficiencies’ (is it the personal dealings of the CEO or issues related to the sale of a loan portfolio to Jefferies?) and India’s central bank considers P2P lending rules.

If you are an investor, you are thinking the idea of P2P lending and investing in a concept is something you want to stay away from. You can sense and smell something, good or bad no-one knows but instinctively it looks more bad than good. Atleast in some parts of the world. What started off as a technology play is suddenly seeing securitisation, high-standards and rules set by technology companies are being bent and everyone is becoming wary. The desire to pump more oil through the engine will not change the engine’s capacity it will just make it vulnerable.

In some cultures where the concept of having cash you never had is a new one – perhaps there is an opportunity to introduce new concepts but more importantly develop a framework with domestic regulators to create a framework that will take into account past (and present) good and bad.

Pardon my ignorance (if you do not agree with my view) but the more you go towards East the more you see people in general taking fewer loans, less risk and and fewer innovations too. Maybe they are correlated, I don’t have any data or research to back it up, just experiences. Investors have followed innovation and disruption regardless of where it has originated. Is it now time to pause and think cultural implications as new habits are developed in different parts of the world, P2P is someone’s money after all.

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