Ever a lender or a borrower be...
By Sanjiv Purushotham
Published: Mon 21 Aug 2017, 6:05 PM
Last updated: Tue 22 Aug 2017, 1:15 PM
Have you ever considered being a financier? For some of us it is a really intriguing possibility. What we usually do on the other hand is to deposit money in a (hopefully) interest bearing bank account. When you do so, the bank lends it out to another entity. Usually, at a multiple of the interest that it pays you. The bank takes the associated risk. The depositor continues to get the agreed interest and is protected against non-payment of loans.
The key to the banks' risk taking ability is aggregation. The bank is able to get the deposits at scale and at the same time lend to a large number of customers most of which are likely to pay back. In a portfolio of loans, historically, only a small percentage is non-performing. The individual lender has so far not had the ability to create a portfolio. The start of crowdfunding a few years ago began to change that. Crowdfunding works in the area of providing returns through some level of ownership of either the product itself or the company which is promoting it. For individual investors seeking a stream of steady income on the other hand, P2P Lending or Marketplace Lending makes more sense.
This form of lending is based on an efficient marketplace that matches the supply of loans (individual or institutional lenders) to the buyers (small and medium enterprise borrowers as well as individuals).
Craig Moore, CEO and founder of Beehive (beehive.ae) is a pioneer in this area in the UAE and the region. Beehive's chairman is Rick Pudner - ex-CEO of Emirates NBD. Moore explained the model in-depth.
With portfolio diversity, Marketplace Lending allows individual investors to take higher levels of risk. Consequently they are able to generate higher returns on the loans that they give out.
At the same time, on the buy side, the limited choice of sources of loans available from traditional lenders keeps margins high. P2P Lending expands the choice, allowing borrowers to shop for interest rates, usually at better terms.
Moore comments that the traditional banking system works very well. The global banking industry has experienced healthy growth in recent years, registering a compound annual growth rate (CAGR) of 4.7 per cent between 2012 and 2016 to reach a value of $134.1 trillion, according to data from research firm MarketLine.
However, the speed of growth of P2P lending outstrips that of traditional banking. An excellent December 2014 whitepaper, A Trillion Dollar Market By the People, For the People published by Foundation Capital, describes the blistering pace at which P2P lending grew from a base of $870 million dollars in 2012. Estimates of the size of the industry vary from between $100 billion to $200 billion. The whitepaper predicts that the market size will be about $1 trillion by 2025.
On average, P2P lending platforms like Beehive are able to reduce interest rate spreads between sourcing and lending money by about 400 basis points (4 per cent). That's because players in this space do not keep the loans on their balance sheets. In addition to matchmaking and market creation, costs related to resource intensive branch and backroom operations as well as legacy back-end systems are eliminated.
As the absolute numbers show, in 2025, even with the strong growth numbers of P2P lending, the banks will continue to be dominant players. Seemingly, it would appear that banks would resist this concept as it impacts their core revenue stream. However, banks know well that their operating model handicaps their ability to reach, lend to and service the segment of smaller enterprises. This can best be achieved by much smaller operations. Therefore, banks are beginning to seriously consider "bank as a platform" partnerships for SME lending.
Bank collaborations are based on two models. The passive model is for banks to participate as investors in the loans originated by the P2P lending platform. Banks commit to a monthly or annual volume of loan uptake or they get an opportunity for first refusal.
In the active model, banks co-brand the P2P lending platform. Customers who meet the bank's threshold criteria get directed to the proprietary loan process. Others get funneled into the P2P lending platforms evaluation and KYC process. The bank usually picks up some part of the loans that are approved on the P2P lending partner's platform.
Beehive is actively working on both models.
2015 was considered to be the watershed year for P2P lending according to Warren Mead, global co-lead for FinTech at KPMG. However, he also commented "a patchwork of inconsistent regulation" was dividing the industry.
Keeping this in view, Beehive has consistently kept the regulatory aspect in mind. While developing the platform, Beehive used the guidelines of Financial Conduct Authority of the UK as the framework. More recently, Beehive was the first P2P platform in Mena to be regulated by the DFSA. The new regulation from the DIFC on P2P lending came into effect on August 1, 2017.
Beehive is the region's leading P2P platform and is well poised to tap into the demand from Mena. Entrepreneurship thrives well in tax-free regimes with excellent infrastructure.
The Merchant Bankers by Joseph Wechsberg is an excellent collection of chronicles about some of the world's biggest merchant banking families. Readers get an insight into the evolution of banking in a post-aristocratic Europe and the shift of the epicentre of banking to Wall Street.
The writer is a partner at BridgeDFS, a bespoke financial advisory firm (www.bridgeto.us). Views expressed are his own and do not reflect the newspaper's policy. He can be contacted at email@example.com