Will Blockchain Technology Bring P2P Lending 2.0?

Introduction

For many investors, the word ‘Blockchain’ is associated with words such as ‘distributed’, ‘transparent’ or ‘immutable’. But what does it mean for the peer-to-peer lending industry?

Both peer to peer models and distributed systems have been around for a while (e.g. Ethernet and ARPANET were invented in the 1970s), and have already established the principles of immutability, asynchrony or consensus. Decades later, Napster further spread the concept of P2P file sharing in 1999. But blockchain, and especially the bitcoin blockchain, helped democratize and improve the performance, reliability and scalability of financial platforms with a stronger focus on security and decentralization. Digital marketplaces such as Lending Club and Prosper leveraged the P2P model to increase financial inclusion and reduce the credit gap by focusing on the under-banked and bypassing traditional brick and mortar lenders. Adding the dimension of decentralized and distributed digital ledgers provides a look into the next generation of digital marketplaces.  The immutability property of the blockchain technology ensures that all transactions are open and auditable by design. In addition, combining it with a consensus algorithm ensures the validity, agreement and reliability of the information thus filling the most important gap in P2P lending: trust. With blockchain technology, and more generally Distributed Ledger Technology (DLT), we can expect barriers such as credit history, geography, currency to soon become challenges of the past.

 

AFRICA: THE RISE OF BITPESA AND BITBOND

According to the Africa and Middle East Alternative Finance Benchmarking Report[1] by the University of Cambridge, “the African online alternative finance market volume was $83.2 million in 2015, a 36% increase from 2014’s $61.4 million”. Micro-finance, crowdfunding and peer-to-peer lending were the three largest models used to raise funds. It is also important to note that the majority of this funding was raised by platforms located outside the continent. Kenya, being already a world leader in mobile based P2P lending, shows how many African countries have largely adopted new technologies as their preferred means to borrow money. This has helped individuals and small businesses bypass inefficient and often corrupt bureaucracies operating on outdated technology and practices.

 

 

 

 

 

 

 

 

Founded in 2013 in Kenya, BitPesa is a digital foreign exchange and payment platform that leverages blockchain settlement to significantly lower the cost and increase the speed of payments between mobile money wallets in Kenya, Tanzania, Nigeria, Uganda, Senegal, DRC and Ghana. Bitbond, a p2p lending platform for SME loans based in Berlin, Germany, announced in March 2017 a partnership [2] to improve access to financing for SMEs in Africa by connecting them to international investors using bitcoin blockchain technology for cross-border payment processing. With advertised returns as high as 25%, the originated loan volume increased from less than $2M at the date of the announcement to more than $11M a year after. Emerging market loans already make up 10% of this total. To overcome the challenge of credit scoring for borrowers, Bitbond uses alternative data from e-commerce platforms such as eBay, Amazon, Etsy, Shopify as well as from social media platforms including Facebook, Twitter and Linkedin.

 

ASIA: THE EVOLUTION OF CROWD GENIE

As mentioned in a previous article [3],the number of peer-to-peer lending platforms in Asia is growing exponentially especially in Singapore, Indonesia and Malaysia. Southeast Asia, with a population of 650 million, is home to a large number of underbanked communities in rural areas where internet is faster and more reliable than a bus ride to the nearest city. In addition, the phenomenal growth of the fintech industry in the region makes it the perfect place for the birth of P2P lending 2.0, utilizing not only crypto for cross border payments but also rethinking the entire infrastructure supporting digital lending platforms.

Let’s focus on Crowd Genie, a Singaporean based licensed and fully operational peer-to-peer lending platform for small business lending that just completed its ICO [4] in March 2018. Their objective is to leverage the Ethereum blockchain protocol to create a Pan-Asia business loan exchange with lower transaction costs, increased transparency (including credit scoring and transactions) and liquidity via their vision of “tokenization of everything”. Their target DLT ecosystem is built on three pillars: a digital passport (the digital identity of each peer covering KYC, AML and FATCA compliance), conducting transactions based on their own token, the Genie token, and a distributed infrastructure facilitating the existence of multiple asset exchanges. The key feature lies in how Crowd Genie’s protocol embeds economic transactions in tokens, which in turn can be fractionalized to aid liquidity among investors. The adoption of reward credits via the Genie token further establish trust, and thus positively impact the digital identity and reputation (i.e. credit score) of the borrower.

 

It will be interesting to see how the platform will overcome known limitations of Ethereum such as scalability and performance, especially with its ambition to grow the number of exchanges and users across Asia. Noteworthy are other frameworks such as Hyperledger Fabric (IBM-backed trade finance platform aimed at international payments) or R3 Corda (backed by multiple major banks) both of which are driven by the financial services industry.

 

 

 

 

 

 

 

 

 

 

 

 

CONCLUSION: P2P LENDING, DLT AND IMPACT INVESTING

Many more initiatives, such as SALT, ETHLEND or LENDOIT just to mention a few, have also received extensive press coverage and remain compelling and promising developments. Harnessing the power of Distributed Ledger Technology (DLT) promises to both stimulate peer-to-peer lending and engender a financial landscape where peers can truly trust their peers. In addition, blockchain technology is playing a major role in bringing impact investing further into the mainstream, particularly with increased interest among Millenials [5]. The transparent approach inherent to DLT helps fill the trust gap and allows lenders to proactively generate financial returns while creating a positive social impact.

[1] https://www.jbs.cam.ac.uk/fileadmin/user_upload/research/centres/alternative-finance/downloads/2017-africa-middle-east-alternative-finance-report.pdf
[2] https://www.bitpesa.co/blog/bitbond-and-bitpesa-announce-partnership-to-improve-financing-of-african-smes/
[3] http://www.digitalmosaicfunds.com/what-the-recent-tala-and-modalku-funding-rounds-tell-us/
[4] https://www.genieico.net/
[5] https://www.toniic.com/millennials-and-impact-investment/