The rise of peer to peer lending
Personal loans without banks.
Peer to peer lending has arrived in New Zealand. Like Uber has disrupted the taxi industry and AirBnB has crashed the tourist market, P2P lending has rocked the big banks. Already well established in the US and the UK, P2P lending services connect verified borrowers with investors.
In late-2014, we launched New Zealand's first and only P2P lending marketplace, Harmoney. This year we attracted significant investment from New Zealand's leading buying and selling platform Trade Me.
How does peer to peer lending work?
New Zealand's banking system is dominated by four big Australian-owned bank brands and their New Zealand affiliates. They pay a modest rate of interest to savers and charge borrowers a much higher rate of interest. The difference in bank saving and lending rates is called the net interest margin (NIM). This is the traditional source of bank profits and is obviously intended to benefit the banks, as opposed to their customers.
Like many online social sharing services, P2P lending marketplaces connect people to each other, cutting the banks out of their intermediary position.
Investors can get good rates of interest on their investments by lending to borrowers who have been verified and checked by the P2P lending service provider.
Borrowers with great credit histories rewarded with peer to peer lenders.
Most of New Zealand's big banks are now paying savers less than the rate of inflation. However, personal loan and credit card rates have not fallen as much as inflation.
Many New Zealanders with great credit histories are paying more at the bank than they could through P2P, while others are unfairly turned down.
Peer to peer lending platforms give loan applicants an interest rate according to their risk weighting. This risk weighting is based on a series of factors – like age, employment and credit history. A person with stable employment and a clean credit history is likely to have a low risk weighting and be eligible for a low interest rate loan.
A loan applicant with more risk factors is more likely to be approved for a loan with a higher 'risk-weighted' interest rate.
Why the big banks hate the new peer to peer lenders.
Traditionally banks held a lot of financial power. They are the intermediaries between borrowers and savers. To borrow money, you needed a bank. To save and invest money, you needed a bank. As a result, banks grew very powerful and became gargantuan.
Now, all over the world, people are disrupting the traditional banking system with P2P lending. Investors are connected safely and securely with borrowers and the banks miss out.
In the United Kingdom, P2P lending is a well-established industry. The UK's P2P market leader, Zopa.com, was established in 2005. Zopa has been voted the “most trusted loan provider” for the last two years. Almost one billion British pounds have been lent through P2P lenders in the UK in the last ten years.
In the US P2P lending is huge, with household brand names like Prosper and Funding Circle taking on the big American banks. In Australia, SocietyOne.com.au has backing from some of Australia's biggest investors like Rupert Murdoch and James Packer.
Now New Zealand's first and only P2P lender, Harmoney.com, is breaking into a tightly held banking market and breaking the stranglehold of the banks in the process. Sound interesting? Check out Harmoney now.