P2P Lending- Are we ready?
I was having a conversation with a friend of mine and we talked about Banking institutions and how they are based on trust and risk mitigation. Like not keeping your eggs in one basket. Very typical of VC ;). He left me with a thought about peer to peer lending in India and weather it can grow or not or what will be the future.
Quick brief I have done couple of experiments in the fintech side specifically microfinance in India. So definitely this thought left me thinking and thinking hard.
Let’s take a quick look on the Banking in India. In a very crude sense banking was born when couple of people pooled in some money and started lending it to people who needed it. They knew the people who they were lending the money to- essentially they all lived in the a same community. Pooling helped the lenders in lowering the risk and helped the borrowers with access to funds. Sounds like a fairytale. And then this whole setup expanded, went across borders and we know it in the form of banks and all different financial institutions.
If we take a hard look the activity of pooling money not just lowers the risk it also increases the trust factor. Trust becomes easy have when lot of people believe in a same thing. And this trust has made the Banking industry what it is today. But does it mean we can only trust a system, a process and not individually- among our peers?
Now let’s explore peer to peer lending. Well simply put it is person lending to person & a very old business working entirely on trust. Back then lenders (loan sharks, relatives, friends etc.) would lend money to people they know and maintained books for keeping the accounts for all the borrowers. In India the lender was called “sahookar” and he would lend money to people in need after keeping some security, sometimes the loans were unsecured also (totally based on the trust factor).
In today’s scenario there is lender & borrowers from across the country and technology is used for match making and book keeping. The trust is “supposed” to be maintained by the platform.
I believe that there are only two major currencies Time and Trust. And looking this age it makes more sense. The more we are civilized we will move towards Time as the major currency as it is limited. And right now we are at an inflexion point in the financial history that we can build more of trust and reduce time taken. And hence create an advanced society.
Now coming back to the question- can we trust only a system or even individuals? Or let’s put it in a different way “what can we do to build trust among individuals?” or Why there is lack of trust.
Based on my experiences in the financial domain I believe out of 10 people 2 are good ones they will pay on time. Three will never pay, they have no intention. The remaining five want to pay but might not have means. But they have an intent to pay.
What we can do to build Trust-
Firstly, Now using today’s technology can we provide them means to pay? Instead of putting them in defaulters can we provide them with options to payback? Options that are catered to their needs.
Secondly, we use technology to predict fraud, can we use the same technology to predict a behavior pattern and then mold it? I am sure we can. This is not something new. Psychologist’s have been doing that for long. Also Microfinance theory suggests that social networks can help reduce information asymmetry in the lending process, and hence motivate borrowers to pay back loans (Katherine & Sergio, 2009). The role of social networks also applies to the online P2P lending context (Lin et al., 2012).
Thirdly, better and strict laws will go a long way.
This will enable p2p lending platforms to flourish and make in turn make a better society. If we can predict and mold money behavior of people we can actually help in building a financially inclusive society.
Money was created for building unquestionable trust. Now I think lets focus on creating trust using money; powered by technology.
Let’s talk some numbers on p2p lending. P2P lending platforms are growing consistently US/UK but interestingly the growth is way more in China. Here is the graph for China. As per the below forecast lending topped 800 billion Yuan in China in 2015, soaring 248.3% versus the previous year. And that China’s P2P lending will maintain its growth in the near future and its market will exceed 3.7 trillion Yuan in 2019.
P2P lending is still in very nascent stage in India and I feel there is a lot more that can be done. But if we ignore it can we build a financially inclusive society? How can we help to people who are not catered by banks or any other financial institutions? I believe the role of technology is phenomenal here as it will help build trust- the most important aspect and help people to move up in the value chain.
This is an expansive topic & i think would need more details. So stay tuned. If you have more ideas and thoughts please feel free to comment. And in case you like it please share.