Borrowing Money With Less Hassle18 May, 2015
Borrowing money is a personal decision that many of us in Hong Kong have to make at some point in our lives. Whether it is for a happy cause, as we borrow in the form of a mortgage to purchase an apartment, to pull us out of a tough rut as we borrow from family during times of financial hardship, a panicked moment as we realize our credit card debt skyrockets faster than we thought possible, or if it’s ‘that friend’ who keeps asking you to spot them another hundred when they wander off to the casino during your weekend trip to Macau...
There are pros and cons to each of the above and many other options we have to borrow money in Hong Kong, and it is always best to know what these options are well in advance. This allows us to make the borrowing decisions that best allow us to reach our goals, while not causing compromises in the future that we are not prepared for.
With that in mind, all Hong Kongers should be aware of the peer to peer (P2P) borrowing option.
Remember that quote that went viral a while back? “Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate. Something interesting is happening."
It really isn't that strange, and in fact it makes a lot of sense. All of these examples are following an “inventory free model” in their business. They facilitate the direct interaction between the provider and user of “things” in their industry, saving a whole lot on costs and complications by not holding inventory and instead focusing on making the experience as positive and easy as possible.
Making things simple
Take Uber as an example. Uber matches you and your cab driver. You both provide each other with a rating out of 5 stars (yes, cab users are rated too, so be nice!) without owning the vehicle (the “inventory”), saving Uber on insurance, vehicle purchase costs, maintenance and coordination (phew!).
P2P works in the same way: it directly matches borrowers (cab users) and lenders (cab drivers), without holding any “inventory” which in this case balance sheet risk from deposits (the actual vehicle).
The loans from lenders and the interest/repayments from borrowers are handled by an independent third party trustee. The P2P company provides the screening, analytics, marketplace, and loan product structuring (the technology, expertise and the app).
P2P is a marketplace, where borrowers can apply for loans to P2P company to rate, analyze and verify. Once approved, your loans are posted, anonymously, for the P2P lending community to fund (you tapped “Set Pickup Location”)
On the opposite side of the spectrum, as a P2P lender, you can view the profile of each approved loan. This includes things such as their rating, amount they wish to borrow and for what purpose, their existing debt and income profile, and their borrowing history on the P2P marketplace. You can then fund the entire loan, or as per typical practice, fund a portion of many loans and spread your risk among many borrowers (The driver decides to pick up the passenger).
Think of this analytical part of the process similarly to how the Uber driver and user rate each other (“Rate Your Ride”), only this happens before and after your transaction.
The benefits are transferred to users of the platform as a lower cost of borrowing (typically 7 – 20%) than numerous alternatives, and a useful return for lenders in a similar range who may be earning close to nothing with their idle funds. The model is efficient and very low cost.
It is also industry agnostic and will likely be seen in many other types of businesses in the future!
Whether it is good for you, as mentioned, is a personal decision. However it is a new hassle free option for borrowing money that you should be aware of.
Author: Shehreyar Jamshed, CFA
Disclaimer: The information in this communication has been prepared without taking into account your objectives, financial situation or needs. As such, it should not be construed as investment advice, nor an opinion on the appropriateness of peer-to-peer lending or alternatives for you. All investment and borrowing decisions should be made individually in regard to your own objectives.