Peer-to-peer lending, also known as social lending, has taken the international lending arena by storm since its establishment just over eight years ago. Gartner, a technology research and advisory company, predicts that, by the end of 2013, peer-to-peer lending will account for 10% of all outstanding consumer personal loans worldwide.
However, in South Africa, this figure is significantly lower, and although not a wildly recognised concept in the South African lending market, it may hold considerable opportunities for mainstream credit providers.
The concept behind peer-to-peer lending is fairly simple - it provides an online platform that puts people who wish to borrow money in contact with people who have money to lend, effectively cutting out the middleman or credit provider. As with so many other areas of modern-day life, technological developments and the age of social media have led to the birth of a new industry, says Tina-Louise Rabie, Marketing Team Leader at Compuscan.
Peer-to-peer lending needs to be separated from the concept of online lending, which refers to credit providers offering their services online. In the case of peer-to-peer lending, other consumers provide the capital, which is lent to those requiring a loan. Consumers can thus act as both lenders and borrowers, providing not only an opportunity to acquire a loan, but also an opportunity to invest money as one would do on the stock market.
The success of the peer-to-peer lending model, like that of online lending, relies on the fact that consumers are increasingly becoming more trusting in online transactions. According to a study conducted by research firm World Wide Worx, titled "Internet Matters South Africa", the total spent by South African consumers, small businesses and government on products and services via the Internet amounted to R59 billion in 2011. Furthermore, the study, which referred to the Internet as the "quiet engine of the South African economy", highlighted that the Internet economy made up 2% of the total South African economy in 2011. It is thus not surprising that this has had an influence on the manner in which the credit industry operates.
Another reason that peer-to-peer lending has seen such dramatic growth in both the United States and the United Kingdom is due to its ability to meet the needs of both lenders and borrowers. For lenders, the typical interest they receive on the money invested/loaned is better than what they may receive from a savings account. However, for borrowers, the interest is often still less than what they would pay if lending from a mainstream credit provider.
Although the risk associated with the concept of peer-to-peer lending may seem to detract consumers from investing as lenders, current peer-to-peer lending platforms boast remarkably low default rates. In addition, many peer-to-peer sites offer contingency funds, which will cover losses from borrowers who default.
To protect the lender and their investment for each loan that is facilitated through the online platform, a strict credit vetting process takes place, which assesses the borrower's credit record and establishes the level of credit risk associated with borrowing to them. This allows lenders to make informed decisions as to the level of risk they are willing to take on. Before funding a loan, a lender can view details on the borrower, such as age, gender and credit score, to determine if they would be willing to lend to them. Furthermore, lenders can diversify their portfolios and, instead of putting their entire investments into one loan, they can rather invest small amounts of money across several loans.
Despite the idea of peer-to-peer lending being new to the South African market, there is evidence to suggest it may be remarkably popular with consumers. Many South African consumers are already accustomed to making use of stokvels, which are, in essence, a form of social lending, albeit not on an online platform.
Despite its possible future popularity in the South African market, established credit providers need not necessarily view peer-to-peer lending as a threat. With their current lending systems, infrastructure, access to consumer credit data and knowledge of the lending industry, credit providers, in particular those already operating online, are perfectly positioned to operate or partner with peer-to-peer lending sites. Thus, instead of peer-to-peer lending being viewed as an impending threat, it could be viewed as a possible marketing opportunity and bring equal benefits to consumers and credit providers alike.
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