P2P lending will be a game-changing evolution if we don’t curb innovation

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The Globe and Mail | STEVEN USTER | June 2, 2015

P2P lenders

Steven Uster is co-founder and chief executive officer of FundThrough, a marketplace lender that provides loans to small businesses.

Peer-to-peer lending may be the biggest innovation in financial services since the invention of the ATM. P2P lenders offer what is often referred to as a marketplace platform that matches borrowers with lenders who get access to a new asset class: small business or consumer credit.

Through these platforms, lenders invest in loans and earn a return greater than their bank savings account, while borrowers gain quick access to capital at a risk-appropriate rate.

Marketplace platforms (see Canadian Crowdfunding Directory) make economies more stable by eliminating the “too-big-to-fail” risk associated with traditional banks. These platforms have no leverage and no balance sheets. They simply facilitate borrowers and lenders coming together

P2P also makes the economy more liquid and fair. Peer lenders increase borrowing capacity by providing a broad range of investors to fund loans, improving the availability of credit for high-quality but underserviced borrowers.

For example, new Canadians overindex in small-business ownership yet underindex in loans from traditional banks. Through marketplace platforms, they can now access the capital they need to grow.

Marketplace lenders are more efficient than traditional financial institutions. Why is it that a small-business owner who sells to Wal-Mart or other similarly high-quality companies often can’t get working capital funding at reasonable rates, if at all? Why is it that a prime-quality borrower pays 20 per cent to hold a balance on their credit card? Meanwhile, investors are earning almost nothing in their savings accounts. P2P platforms are able to price loans more efficiently, and therefore more appropriately, for borrowers.

Although prevalent in the United States, Britain, Europe and Australia, marketplace lending is a new and unproven concept in Canada, and therefore has few specific regulations.

In order to foster innovation that will benefit all stakeholders and the Canadian economy as a whole, regulators should focus on four areas as they consider regulating this game-changing industry.

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First, adopt a presumption of permission, instead of a presumption of prohibition. Former U.S. Treasury secretary Larry Summers recently compared the evolution of marketplace lending to the evolution of the Internet. When the Internet was starting to take off in the 1990s, U.S. president Bill Clinton created a task force of advisers to make recommendations on how it should be regulated.

After much debate, they decided that as long as basic principles on privacy and illegal activity were adhered to, the government would step back and let the Internet develop. A similar approach would be appropriate with marketplace lending.

Second, insist on full transparency and disclosure and then let borrowers decide. Regulators should insist on a standard presentation of rates, terms, structure, fees and prepayment penalties across platforms.

Borrowers need to clearly understand what they’re signing up for and what their recourse is, and should then be able to make their own decision based on business or personal needs.

Lenders should have full access to data and the ability to diversify portfolios in order to make investment decisions with confidence that the data being presented are accurate and free of manipulation.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country.  NCFA Canada provides education, research, leadership, support and networking opportunities to over 950+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada.  Learn more About Us or visit www.ncfacanada.org.

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