By Sean Emery
Peer-to-Peer (P2P) lending – where online platforms facilitate consumers lending money to and borrowing from each other – is on the rise across the world. The reason for this is simple: people want to wrestle control of their financial lives back from the banks and enjoy better interest rates whether they are saving or borrowing money.
The numbers coming in from Asia, North America and Europe are staggering. In the US, the Lending Club and Prosper platforms facilitate loans worth $100m per month, while UK based P2P sites are this year expected to facilitate in the region of £200m of loans to both individuals and small businesses.
In China, where offline social lending practices are similar to South African stokvels, P2P platforms are taking off as lending among family and acquaintances moves online. There is every reason to believe that P2P lending will gain traction in South Africa as quickly and dramatically.
P2P platforms effectively cut banks out of financing by linking people looking for returns on cash deposits with people looking to borrow money, be it personal loans, car loans, SME financing or mortgages.
South Africa, controlled by a banking oligopoly, is ripe for just such a radical business model to bring more competition to the market.
Around 90% of SME and consumer lending in South Africa is in the hands of six banks. Not only do these banks offer ungenerous interest rates to lenders and borrowers alike while levying high fees and tariffs, they are also conservative about who they lend money to.
P2P lending has a strong role to play where banks fear to tread. The situation isn’t unique to South Africa – in the UK, government has tried to boost anaemic credit supply by allowing P2P platforms to qualify for up to £100m of government investment.
Perhaps our government will even emulate the UK by supporting P2P credit to the SME sector, the newly banked, and low income earners trying to get mortgages for properties costing R500,000.
Other niches where P2P financing can step in are invoice financing and mortgages to people older than 55 and to self-employed individuals. These borrowers as well as mainstream borrowers with good credit records may find they can get P2P loans quicker and cheaper than they could through traditional lenders.
There is a clear need for credit, so the customers for P2P platforms are there. Many of these borrowers are already comfortable with peer financing in the form of stokvels, so in a sense we are simply supplying them an online version of a practice they are comfortable with.
The lenders will be there, too, since many people are looking for higher returns on their capital. P2P loans enable savers to earn higher interest rates by lending their money to other people rather than hoarding it in a bank account.
We believe that people can make in the worst case scenario a return of 8% or more if they diversify their P2P loan portfolios – attractive compared to the 2.5% or 3% banks are offering on money market accounts. That’s a compelling proposition in today’s financial climate.
With South African banks facing so many challenges – regulators pushing them for more transparent charges and tougher requirements on capital as a start – the time for the P2P lending model is at hand. We believe that there is a sustainable business to be built in this sector simply because borrowers and lenders are both looking for alternatives to traditional finance.
P2P lending in South Africa is just starting its upwards trajectory. It’s probably one of the most exciting developments in the financial services industry for years.
Sean Emery is the CEO and a co-founder of RainFin