A new socially driven peer-to-peer money market service, RainFin, went live today, with plans to disrupt traditional financial services in SA.
RainFin provides a secure online platform within which users can invest and borrow money at more competitive interest rates, cutting out SA's traditional banking sector.
The platform hinges on the concept of social lending, which refers to lending that takes place online with an element of social networking interaction in the credit application, granting and collections process. RainFin says there are two types of social lending, the first being where ordinary money lenders, such as banks, use apps in social networks to lend money.
The second type of social lending is where individuals use their social networks to assist them to make loans to each other or groups of people who have a social aspect in common. This is the space in which RainFin hopes to operate - specifically in facilitating peer-to-peer (P2P) lending.
“Banks are intermediaries who have placed themselves between people who have money and people who need to borrow money,” says RainFin. “P2P is a new concept in the financial services industry that disintermediates banks by using a secure online platform to match people who wish to borrow money with those who have excess cash that they want to lend for a good return.”
People power
According to RainFin, borrowers may qualify to be charged as much as half the interest rate currently offered by banks, while lenders may be able to achieve double the rate of return they receive in current accounts. RainFin is the brainchild of technology and financial entrepreneurs Sean Emery and Hannes van der Merwe, who hope to replicate the success of P2P lending services such as Lending Club and PeerForm.
“Social lending is ultimately about people power,” says Emery. “Consumers are beginning to understand that there is something fundamentally flawed in a model where banks loan money out at prime plus two or three, take cash deposits on interest rates below prime, and essentially pocket the difference, in addition to a range of charges and fees.”
Emery says the amount of inefficiency and complexity in the market makes the banking sector as ripe for disintermediation through the Internet as travel agents and insurance brokers. “Against the backdrop of a global financial crisis where people feel that the big banks have failed them, consumers are beginning to look at alternatives such as P2P or social lending.”
Serious threat
“The rise of social lending could pose a serious threat for SA's banking oligopoly. It is a direct challenge to them to innovate and drive some of the high costs and complexities out of their lending models after years of stagnation in product strategy,” says Emery.
Emery says he firmly believes the concept of P2P loans is here to stay, citing a prediction by Gartner that, by the end of 2013, globally, 10% of all loans will be secured on P2P platforms.
“RainFin is bringing this model into SA because we believe it will find a receptive market here. The country has a well-established stokvel sector - essentially an offline P2P industry worth R44 billion.”
The service is aimed at SA's online population, and is available to anyone over 18. “P2P lending is not necessarily about bringing new people into the market, but rather about eliminating the costs of bricks-and-mortar middlemen,” says Emery.
Borrowers will be subjected to a strict credit vetting process, and can apply for loans between R1 000 and R75 000 with a maximum repayment period of one year. Lenders can invest between R100 and R500 000 in up to 100 different loans at a single given time. Should a lender want to invest in more than 100 loans, they will have to apply to become an authorised credit provider.
Both borrowers and investors remain anonymous to each other throughout the process. Investors are, however, given credit risk information based on the borrower's credit score, location, age and gender. RainFin will earn its revenue through a 3% transactional fee on every loan.
By the book
Emery explains that RainFin is not a bank or a money lender, but rather a “socially driven P2P money marketplace”. Emery says the start-up does not require a banking licence because at no point does it take deposits from users.
“RainFin has ensured that we abide by all laws and regulations relevant to our business.” These include the pending Protection of Personal Information Bill, the National Credit Act, Financial Intelligence Centre Act, money laundering and terrorism laws, and all relevant tax statutes.
“RainFin is also registered with the National Credit Regulator as a registered credit provider.”
Should a borrower default on a payment, RainFin will follow the standard legal processes for debt collection. However, Emery notes the reality of the service is such that returns on investments cannot be guaranteed, and the risk ultimately lies with the lender. Emery adds that, initially, RainFin is likely to decline over 85% of loan applications to ensure the service has a base of highly creditworthy users.
Emery says security has been top-of-mind for the service throughout its development, and all user information is highly encrypted at every stage of the process. The service went live today, offering uncollateralised loans, but other products such as SME financing and mortgages will be added in the coming months.
“While the Internet has brought about online banking and mobile banking apps, it is yet to bring about any fundamental change to the actual role of the bank in the process,” says Emery, adding that the concept of social and P2P lending is actually nothing new.
“The question we should ask is why did banks take over something that was inherently social in the first place? Of course banks promise scale, efficiency and security, but the Internet has evolved to the point where it can now provide all of those things.”
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