Over the last decade, we have seen a rising dominance of technology driven companies disrupting the traditional way of doing business. Increasingly, the most dominant players in their respective industries have a larger propensity of using technology to provide better services at lesser cost. Closer home, we have seen how Zerodha went on to become the largest broker in India by completely disrupting the traditional broking business model.
Another business is ripe for disruption; particularly in the traditional lending space. Organised lending has so far been the sole bastion of banks and larger financial institutions (NBFCs). We have also seen micro credit organisations but mainly operating in rural segments. Peer to peer lending has brought in technology in the business of lending. There are multiple benefits technologies bring to the table when it comes to lending industry.
1. Lesser Overheads – Traditional banking and NBFC businesses have relatively high overheads in terms of branches, full time staff etc. as they did not evolve an online model of working. Peer to peer lending enables disbursement of loans on the platform (website). So, this business model cuts down on the overheads with the help of technology. This results in lesser interest costs to borrowers & higher returns for lenders.
2. Two-way market place – This type of market place is an enabler (platform/website/mobile application) for economic exchange directly between 2 set of users. e.g. Amazon (it brings together sellers and buyers for commerce.), UBER (It brings together drivers and commuters). Similarly, peer to peer lending platforms bring borrowers (people requiring money) and lenders (person having surplus money willing to lend to earn returns) together. Two-way market place brings efficiencies in pricing as well as fulfilment of requirements of both set of users.
3. Dynamic Pricing – There are various data points used to verify the risk of the borrower and check the feasibility of onboarding the borrower on the platform. Depending on the risk profile of the borrower, the price of the loan (interest) to the borrower changes. Higher the risk, higher the interest and vice versa. Technology (machine learning) used helps keep improving the data points used in risk analysis. Due to the detailed analysis of risk, the interest rates charged can be defined with mode precision. This in turn results in ability to price the loans depending on the risk of the borrower. In traditional banking business, there are fixed few parameters to assess the risk of the borrower, hence there is little or no scope for dynamic pricing.
4. Vetting the borrower – Multiple data points are used to assess the risk profile of the borrower. The data points can be physical (IT returns, bank statements, credit card statements, cibil score etc.) and electronic (emails, fb profiles, health tracker data etc.). Due to machine learning technology, more and more parameters get added from the analysis of defaulted borrowers.
5. Auto Invest – Technology allows most platforms to offer features such as Auto Invest which enables the lender to lend small amounts across borrowers who fulfil the selected criteria i.e. risk profile (low, medium, high), Amount, City, Income Source etc. This can save lot of time for the lenders not familiar with / who do not have the time to shortlist potential borrowers from the available list.
One needs to remember; P2P lending is not risk-free; without risk there would be no (incremental) return. The platform only offers unsecured loans (no collateral to fall back in case of defaults) and there is no assurance of return of principle or interest. However, technology is a great enabler in risk mitigation. Hence, with some due diligence, making informed choice of the risk and expected returns and diversifying across a wide range of borrowers, it is possible to get a good return on such investments.
Using technology as enabler of risk mitigation and efficiency, P2P lending aims to generate decent returns for the lenders in accordance with their risk appetite, offers competitive interest rates and better credit availability to the borrowers, – a true win-win.