Innovators Use Technology to Tackle Student Loans12 June, 2015
If you're wondering how you can afford to go to university, you might be interested in the new peer-to-peer (P2P) lending model.
"P2P lending is like eBay for loans, uniting borrowers and lenders online," explains Mukesh Bubna, CEO of financial technology start-up Monexo Innovations.
"It's similar to eBay, Airbnb, Uber, FoodPanda and other technology start-ups that create an online marketplace. This removes intermediaries, the middlemen between producers and consumers, which in this case are banks and moneylenders. The P2P lending model is disrupting and reinventing the old banking model that sits on a large profit margin."
The idea is to make banks and the loan market more efficient.
In the past 20 years, the proportion of students worldwide going to university has doubled, while the average cost of tuition at private four-year institutions in the US has shot up by 146 per cent, to approximately HK$250,000 per year.
These costs limit a student's ability to have an equal, fair shot at an education. This, therefore, reduces their ability to be financially secure, compete in the job market, and move up the ladder.
According to a 2013 Hong Kong Federation of Youth Groups survey, students seeking government loans to finance this rise in fees may face debts of up to HK$192,000. Two-thirds of students work part-time to stay afloat.
The Hong Kong government has tried to address this. Over the past three years, the Working Family and Student Financial Assistance Agency loaned out HK$1 billion annually. Yet, more than 13,000 students were still unable to repay their loans.
A main factor in loan cost is the interest rate, the percentage that the borrower pays to the lender to use their money. After an online application, Monexo filters and grades borrowers and lenders based on their financial risk history. Then it recommends an interest rate between 7 and 20 per cent per year, which is "cheaper than moneylenders and comparable to banks' student loans", says Bubna.
"We remember sacrifices made by our generation's parents to send us to universities overseas," he adds. "Many of our friends could not afford to go where they deserved to. We were the lucky ones. We left high-flying banking careers to do things that matter.
"When you leave money in the bank today, you earn nothing - 0.001 per cent. But the same banker turns around and gives you a credit card at 35 per cent [interest]. You can imagine how profitable these banks are if they borrow cheaply and lend expensively. P2P brings these to [a state of equality].
"P2P lending has taken deep roots in the USA, Britain and China. In Britain, it is now doubling every six months." P2P loans can apply to business ventures, home improvements, medical expenses, debt repayments and more. Global leaders of P2P lending publish their entire loan performance records online to help their financial transparency.
"These records are a tightly kept secret for banks," Bubna says. "We had the last financial crisis because banks took large risks and the public could not check where their money was going."
As with any financial innovation, borrowers and lenders should be aware of the risks. The Hong Kong Deposit Protection Board does not insure loans for lenders, so they are advised to use the platform for a small proportion of their savings since investments are high-risk.
The Hong Kong government has yet to regulate the P2P industry, meaning all safeguards are voluntary and not backed by law. Hong Kong's P2P sector is an infant industry, so it is difficult to pinpoint which P2P firms are reliable since they do not have a track record yet.
"For borrowers, P2P lending is the most abused word in Hong Kong," says Bubna. "Moneylenders call themselves P2P lenders, but charge steep interest rates [capped at] 60 per cent [according to Hong Kong's Money Lenders Ordinance]".
P2P lending has gone through years of hype and had its reputation tarnished as part of the "shadow-banking" sector that helped banks take risky investments without explicitly declaring them on their books.
Monexo attempts to differentiate itself from unregulated "shadow banks" and moneylenders that claim to be P2P lenders. Hong Kong Trust, an independent institution, holds the money exchanged through Monexo to prevent theft. Special software tracks money to ensure the same level of internet security as banks and prevent criminal cash from entering the system.
If you'd like to find out more, Monexo runs a Facebook campaign on financial literacy with quizzes and reading suggestions.
Author: Daniel Monterio – Young Post: SCMP