Peer to Peer Lending: The Future of Fintech is Now

Lending Loop | Reza Jafer | July 24, 2019

Peer to peer lending the future is now - Peer to Peer Lending:  The Future of Fintech is NowPeer-to-peer lending is on the rise. It is steadily growing and becoming an increasingly significant part of financial services in the UK, US and Australia, among other countries. With an emphasis on speed and transparency, these platforms are addressing the needs of investors and small businesses by reducing bureaucracy and administration costs to offer better interest rates to both groups.

According to an article published on TechBullion, peer-to-peer lending is attracting more investors and borrowers with the volume of loans increasing drastically on a global scale and “is predicted to come close to $1 trillion by the year 2025.” There is an increase in the volume of investors who are already experienced with peer-to-peer platforms, and the number of new investors is continually growing.

Investors’ growing demand for peer-to-peer lending platforms raises some interesting questions, regarding what makes peer-to-peer lending so different and appealing on a global scale.

 

What sets peer-to-peer lending apart from other fixed-income investments in Canada?

Some of the key attributes that set peer-to-peer lending apart from traditional fixed-income are the low amounts of capital needed to build diversified portfolios, the potential for higher yields, and having a direct impact on the success of businesses across Canada.

Recognizing that Small & Medium-sized Enterprises (SMEs) employ approximately 90% of the Canadian workforce, the shift to supporting local businesses is here to stay. Peer-to-peer lending enables everyday Canadians to invest their money locally and support communities around them, in addition to supporting local businesses through other means, like purchasing their products or services. Peer-to-peer loans offer an opportunity to invest with a conscious and purpose, without compromising returns.

Is there a reason why peer-to-peer lending is gaining so much traction in Canada?

First and foremost, it provides everyday Canadians with a unique way to diversify their financial portfolios. If you are a Canadian investor, there is a very high probability that your net worth is significantly exposed to just a few industries like financial services, natural resources, telecom and real estate. Between your employer, pension and home ownership, it is prudent to diversify your concentration to these few industries. Peer-to-peer investments are offering unprecedented access to investments that were previously only available to financial institutions and high net worth individuals. Canadians are more financially-savvy than ever, and peer-to-peer investments provide an innovative way for everyone to take control of their wealth.

See:  Peer-to-peer lending will help small businesses stay afloat

Investors looking to diversify their portfolio and feel more connected with their investments should definitely consider including peer-to-peer investments in their portfolios. 

 

What role do you think peer-to-peer will play in financial services by 2030?

In the last decade, we’ve witnessed a ‘retail revolution’ of sorts, with E-commerce juggernauts like Amazon and Alibaba changing the way consumers purchase goods. By providing consumers access to products all across the world at ever-lowering prices, long gone are the days of costly, and often redundant, intermediaries of the sales cycle. The removal of costly intermediaries isn’t exclusive to the B2C space.

It was simply a matter of time before we turned our attention to financial service providers and our investments, to re-evaluate traditional offerings. Of late, we have witnessed the popularity in democratizing access to traditional investments, like stocks and bonds, through ETFs and self-directed trading. But much of the alternative investment space is still only accessible to high-net-worth individuals or are wrapped up in age-old fund structures with high-costs in place.

Peer-to-peer investments aim to provide access to an asset class that has been traditionally held by financial institutions and it has reinvented how fixed-income investments can help Canadians build their wealth. Today, peer-to-peer is still a nascent concept in the Canadian market, but by 2030, I believe this will be the normal way of investing or borrowing. Peer-to-peer is simply a reimagination of a process, whereby we are democratizing lending and connecting Canadians with capital directly to Canadian small businesses seeking it.

 See: 

Would an Open Banking framework accelerate some of these changes or alter the landscape altogether?

Absolutely. For the lending sector specifically, the potential of Open Banking is significant because we often work with an underserved segment of the market. At times, it can be difficult to quantify the potential of these groups, but if the UK serves as an indicator, the economic potential in both urban and rural areas could be significant. In the UK, we see reports that peer-to-peer platforms have had a tremendous impact on job creation. While the consumer experience is a key element, the impact goes far beyond that, to the point where our government should consider how Open Banking contributes to job creation and economic growth, especially when evaluating what it could mean for Canadian consumers and businesses.

We see a huge opportunity for all of the above, especially for Canadian business owners, who would be able to receive more tailored financial service products and develop a more thorough understanding of the financing options available to them. Shifting the ownership of data to the business owner rather than the institution opens up countless new opportunities for fintech providers to offer customized solutions and services. With a scarcity of available data, the full capabilities of artificial intelligence and machine learning are not being maximized. Open Banking has the power to change this paradigm significantly.

Similarly, Open Banking would increase choice for investors and result in more investor-focused products and processes. In the UK, we’re seeing an exciting evolution of financial services and increased integration as peer-to-peer platforms like Zopa are looking to launch digital banks. They are part of a growing number of emerging challenger banks in the UK. It’s exciting to see this space grow and more competition enter the market just one year after implementation. Open Banking is clearly enabling this kind of competition in the UK and an Open Banking framework in Canada might open up similar possibilities.

See:  Canada’s financial upstarts are lining up behind open banking, but bigger players may need convincing

We don’t have a history of challenger banks the way other jurisdictions do, but with the speed of innovation in FinTech, we might see the emergence of multiple challenger banks in a way we haven’t seen before. That’s just one piece of a much bigger picture. On a larger scale, an Open Banking framework could facilitate unprecedented innovation in Canada’s financial services sector which is essential to our prosperity and competitiveness.

Who wouldn’t want more of that?

 

Reza Jafer head of wealth management lending loop - Peer to Peer Lending:  The Future of Fintech is NowReza Jafer, Head of Wealth Management, Lending Loop (www.lendingloop.ca)

Reza Jafer has some insights into those very questions. As the Head of Wealth Management at Lending Loop, he oversees investor relationships and is dedicated to helping Canadians build successful, diversified portfolios. Before joining Lending Loop, Reza worked at two of the largest banks globally within their Corporate & Investment Banking divisions, focused on financing and advising some of Canada's largest companies.

 


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