What is P2P lending?
Peer-to-peer (P2P) lending is a method of debt financing that enables individuals to borrow and lend money without the use of an official financial institution as an intermediary. It removes the middleman from the process.
In daily occurrences, we all have acquaintances and friends borrowing money from one another. Due to this personal relationship which both creditor and debtor has with each other, the loan is usually secured based on a trust factor, eliminating uncomfortable documentation. To bring up the idea of documenting or legalising this interpersonal loan between acquaintances, it will result in uncomfortable and, often, pretty nasty situations.
However, due to the agreement functioning based on trust and lack of documentation, debtors often do not pay back in time and creditors find it hard to pursue or even take any legal actions to recover the debt. Creditors often make a loss during such transactions. When referring to peer-to-peer transactions, it may look like a small amount, but if we were to combine the total number and amount of transactions made, it accumulates to become a huge market.
The Growing P2P Market in Korea
Based on payment and settlement statistics data from the Bank of Korea, it is estimated that close to 500,000 interpersonal transactions happen annually with an average of 3 million KRW (US$2,651) per transaction. This amounts to a whopping 1,400 trillion KRW (US$1.2 billion) of interpersonal money transactions. The calculation is made with an estimation of 10% as interpersonal transactions from the data on digital banking, foreign currency exchange, at ATM machines as well as from local banks — which means that Giro, CMS and e-commerce transactions are not included in this amount, inferring that the total amount of interpersonal transactions would be way bigger. The growing P2P market is not only apparent in Korea.
According to a ResearchandMarkets report, the global P2P lending market is projected to reach US$460 billion by 2022, growing at a CAGR (compound annual growth rate) of 51.5% from 2016 to 2022. The growth of P2P lending is also based on various factors such as technological advancement and convenience with social media and mobile application usage.
In P2P lending, the smart contract plays a huge part.
What is a Smart Contract?
A smart contract is a piece of computer code that runs on top of a blockchain which contains a set of rules the parties involved in the contract agree to interact with each other. They are predefined conditions determined by issuers and are coded accordingly. If and when the conditions of these are met, the agreement is enforced automatically.
The contract does not require a middleman to validate it. It is used to help one exchange anything of value — money, property, shares in a conflict-free way while avoiding the services of a middleman.
Why do we need smart contracts?
Typically, when one conducts business (such as taking out a loan), the parties concerned would have to fill up paperwork and request for approval. This can take up a significant portion of everyone’s time and resources. However, it is different in smart contracts. The codes present are used to automate processes. With the automation of the task in a business process, one will save much time and especially so for small and micro businesses, business owners can move to the next stage quickly.
Similarly, when someone fills up a form — perhaps heaps of them — there may be human errors. Such errors can occur at any point of the business process, such as when one party misses out on an information or makes a mistake on the document, which leads to delays due to revisions and follow-ups. Smart contracts provide the information automatically, greatly reducing human errors, thus saving time which is of great value to individuals and business owners. Who wouldn’t wish for a seamless and quick process of their business operations?
Transparency: Trust and Protection
Due to being on the blockchain, the documents are on a shared ledger, subjected to verification by many computers. This way, it reduces the possibility of tampering with data, which protects the authenticity and validity of all parties’ interest. Also, the data is secured with cryptograph. As such, it makes hacking extremely difficult.
How does Reditus use smart contracts?
Here, Reditus enables P2P loans and crediting with its Receivables Management System (RMS). Reditus does not merely act as a platform for P2P lending between individuals (connecting debtors to creditors), it also serves to help individuals manage and trade their P2P loans conveniently. It allows easy documentation between individuals within the RMS, which in a traditional setting would have been unavailable.
Within the RMS, individuals can register their cash loans on the platform and trade receivables with other individuals without a middleman. The smart contract in the system allows the loan trading and management process to be convenient and transparent.
With the introduction of the Reditus RMS into the receivables market, individuals who had not been able to access loans traditionally in the past now have the opportunity to do so. They are now able to access, manage and trade loans, aided by quick and detailed documentation and verification. By doing so, it unlocks even more opportunities for them, bringing the receivables market to its highest potential. Reditus seeks to revolutionise P2P lending in this technological age.