Why Ripio Credit Network is a real solution to peer-to-peer lending
So far, many attempts have been made to build lending solutions with new technologies.
There are several peer-to-peer platforms and innovative alternatives based on crypto services that connect fund-holders with fund-takers. Some of these are really effective in reducing intermediaries as well as in reducing fees and inherent bureaucracy, but practically all of them eventually go down due to high fraud levels, which result in in bad default rates.
The main reason for their lack of success? They share major issues in their business logic:
1. Conflict of interest
The majority of peer-to-peer lending services evaluate the credit risk on the investor side while, at the same time, they become pretty much involved the origination of the loans.
This represents an evident conflict of interest (agency-problem). The lending service providers evaluate the credit risk associated with the borrowers but don’t share the risk with the investors.
2. Diversified lender assumption
Adding to this agency-problem issue, even the most serious peer-to-peer lending projects assume the existence of a diversified lender, which is almost never true.
These services evaluate homogeneous credit portfolios, overlooking that those who actually use the platform to make an investment do it in 1, 2 or 3 credits at most, but don’t usually invest in portfolios. Even when the credit expectations for a group of investors are met, some lenders will inevitably perceive a huge loss.
3. Default-exposed investors
Finally, every time a non-payment loss occurs, the investors who suffer an asset default are on their own. Most of them have neither the experience nor the right tools to perform debt collection strategies.
This gets even worse for the investors the more global the lending service becomes. Just imagine a US investor trying to collect and to make Brazilian borrowers meet their credit obligations.
The Ripio Credit Network solution
In this scenario, we are launching Ripio Credit Network, a global peer-to-peer credit network based on cosigned smart contracts and blockchain technology. Within this global network, we introduce a new agent that can solve these 3 major lending-related problems: it is the cosigner.
In RCN, several lenders will assign part of their credit risk to the cosigner in return for a small fee. The cosigner doesn’t know which loan will be defaulted but can estimate what will be the average loss for a portfolio of similar loans.
Whenever a borrower defaults, the cosigner can use the fees collected from all the lenders to compensate the ones whose loans have defaulted. Furthermore, the cosigner carries out different collection strategies to pursue the defaulting debtors.
With a cosigner, the risk can be now properly evaluated: the credit risks are grouped among similar ones and thus neutralized, the debt is managed professionally in the borrower’s country of residence.
This is why the inclusion of a cosigner substantially reduces the network loss and, as a result, improves credit conditions for both lenders and borrowers.
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