Blockchain-based peer-to-peer lending is exploding. And understandably so — with the global P2P lending industry all set to reach the one trillion U.S. dollar mark by 2050, blockchain companies are trying hard to propose solutions that solve its biggest challenges.
As makers of one of Australia’s first few P2P lending platforms, we’ve experienced first-hand the different challenges P2P players face.
When building and running Lending Hub (our now dissolved P2P loans platform), we constantly grappled with:
- Finding better ways of engaging third-party KYC and credit scoring solution providers
- Trying to work out the logistics of international payments
- Speeding up the lending process
- Meeting the regulatory requirements
And tons of other issues.
These traditional P2P lending problems — that are also common to most legacy financial institutions — don’t just slow down the business but also clamp down the possibilities of scaling. But blockchain-powered P2P lending can change this.
Let’s now look at how some of the most innovative blockchain-powered decentralized P2P lending companies aim to take on the challenges in legacy P2P lending and help democratize the industry.
Bringing transparency to legacy peer-to-peer lending
A common reason traditional peer-to-peer lending platforms fail is the lack of transparency in the transactions and default scenarios.
Even big P2P players are prone to this. For example, UK’s P2P lending platform, Quakle, had a near 100% default rate which caused it to shut down. Lending Club of U.S. reported a 9.8% default rate on high-risk investments while 36.1% of its competitor’s U.S.-based loans also defaulted.
If data about the overall health of the P2P platform and its transactions and default scenarios is available to all the participants at all times, P2P lending can be made much more successful and safer.
Blockchain is a natural solution for this issues as all the transactions on a blockchain are public. Which means the entire ecosystem can see them.
Lendoit, a company that aims to help “P2P lending mature into real peer-to-peer business” uses blockchain to make the lending process fully transparent for its users.
In addition to facilitating transparent person-to-person loan transfers (and eliminating the “third person” or the intermediary’s escrow account from the picture), Lendoit makes the lending process safer for the lenders with a public “Smart Compensation Fund.” Lednoit’s Smart Compensation Fund is used to cover the lender’s losses when the borrowers fail to pay up.
Unlike traditional P2P platforms, this fund’s status is available to all the lenders at all times. Also, the formula to calculate the compensation for default funds is available to everyone on the platform.
Lendoit’s borrowers too are protected against all sorts of biases with its transparent borrowing process. When a borrower signs up on Lendoit and creates a loan application, the identification details of the borrower are kept confidential. This attracts impartial tenders from the lenders and the borrowers benefit by getting competitive, unbiased rates.
Democratizing peer-to-peer lending with fair interest rates
A common problem peer-to-peer lending platforms face is the range of interests — which can be anywhere below 10% to about 40% or higher.
Because the rate of interest depends on factors like the lender’s preferences and the borrower’s credit history among a host of other factors, peer-to-peer loan platforms can do little to standardize it. Inflation-adjustments make the matter worse for the borrowers.
But blockchain-based crypto lending companies like ETHLend are taking on this problem. This crypto peer-to-peer lending platform solves the problem of inflation-adjustments in the rates of interest globally.
ETHLend proposes to eliminate the inequality of random interest rates for the borrowers by building a truly global peer-to-peer lending system. ETHLend aims to realize a truly “address-to-address” or intermediary-free peer-to-peer lending and make it accessible to the “unbanked” masses at competitive rates. The company’s white paper explains how blockchain and cryptolending can bring about the true decentralization of peer-to-peer lending:
First, crypto-currency is not affected by FIAT-based currency inflation. Therefore, borrowers are treated equally in positions since they are all borrowing ETH. This means that no government monetary policy or economic change in FIAT-based country affects directly to crypto-currency lending. Secondly, the lending market is open for all lenders and borrowers. It results in lending, that is not restricted by borders, jurisdictions or even by the access to banking system.
By building an intermediary-free global peer-to-peer lending network, ETHLend gives borrowers access to more lenders thereby attracting lower interest rates. Whereas lenders also get to explore lending opportunities outside of their local networks.
Taking peer-to-peer lending due diligence to a new level
The success of a P2P platform largely depends on its ability to perform due diligence and credit assessment. If a platform fails at these, then it sees more default cases than repays.
Most traditional P2P platforms lack the resources that institutions like banks have when it comes to making the lending process safer for the investors. While they’re exploring advanced AI-driven ways to do these, there’s still a long way to go.
Blockchain-based decentralized P2P lending platforms get a head start here as they can engage a global workforce of service providers for doing the due diligence and accessing credit assessments. As blockchain companies aren’t bound by most of the territorial jurisdiction issues, they can access a much larger pool of service providers that provide much more data than centralized platforms can gather via their limited network of service providers.
Facilitating decentralized cryptocurrency and FIAT peer-to-peer lending platform, Inspeer aims to build a “modern financial platform, designed to meet the demand for financial innovation and improved financial system efficiency through blockchain technology.“
Inspeer’s focus is to make peer-to-peer lending safer with thorough due diligence. To do so, it has designed InsCore and OLAF, its credit scoring and anti-fraud systems.
Inspeer’s InsCore uses AI and machine learning technologies and about a 1000 scoring cards for evaluating the creditworthiness and reliability of a borrower. InsCore’s analytical Library uses more than 20,000 data input values and variables from traditional and alternative sources. All this information is also used when calculating a fair rate of interest for the borrower.
Inspeer’s anti-fraud system OLAF helps identify fraudsters early on – even before a loan application is posted. This also saves operational costs for the platforms as the potential defaulters aren’t engaged.
A bunch of blockchain-powered digital identity management and KYC solutions like SelfKey are also readying up with their services to assist with the due diligence needs of the new decentralized peer-to-peer lending economy. These solutions enable P2P networks (and other financial companies) to complete their users’ KYC within minutes while offering a great onboarding experience to the users.
Wrapping it up …
The decentralization aspect already inherent in the P2P industry makes it a natural use case for blockchain. And the transparency, equality of interest rates, and enhanced due diligence blockchain intends to bring to it makes it a winner for both lenders and borrowers. With all these blockchain P2P lending platforms gearing up for launches, the P2P industry is all up for a complete overhaul.
This is also a great time to build decentralized P2P lending platforms as more and more countries are now regulating their P2P industries. In countries like U.S., Australia, Canada, and Germany (where the P2P lending industry is regulated), it’s already a popular alternative finance scheme with at least one fourth of the people already using it to borrow finances. China (where P2P is largely unregulated) and India (where P2P was mostly self-regulated until recently) also have huge P2P market potential. As more and more countries start accepting P2P as a mainstream financing option, these blockchain peer-to-peer lending startups will only do better.
At Kapitalized, we consult on many blockchain projects, especially in the financial niche, and we believe P2P lending to be one industry that blockchain will truly disrupt. If you’ve any questions about planning and building a decentralized P2P platform, do get in touch.
Also published on Medium.