Increasingly innovative and sophisticated analysis of social data is enabling start-up company RainFin to challenge South Africa's banking giants.
A pioneer of the local peer-to-peer (P2P) lending industry, RainFin is aggregating social data with conventional credit information to gauge the credit-worthiness of potential clients and accelerate the granting of loans. Credit scoring is a crucial component of online P2P lending platforms that seek to link prospective borrowers of money with willing lenders. Low overheads and high levels of automation enable P2P platforms to offer both borrowers and lenders highly attractive interest rates. The market potential for P2P lending is vast.
"We're currently processing about R12 million of unsecured debt finance a month. We think this is just the tip of a very large iceberg," says RainFin CEO Sean Emery. He reckons the combined value of the P2P market in South Africa will in a few years match the revenues of some of the big banks. In the US, P2P providers such as Prosper and Lending Club have forged a fast-growing market expected to be worth $8.8 billion this year.
RainFin's potential has already caught the eye of Barclays Africa. The multinational banking group, which controls Absa, bought a 49% stake in RainFin in April. RainFin makes its money by charging clients a service fee for using its online platform. Lenders transfer money directly to the borrowers they select on the service. They also carry the risk of possible default on the loans. "The long-term viability of RainFin depends on its ability to provide lenders with accurate assessments of the credit worthiness of potential borrowers," says Emery. "We advise lenders never to put more than five percent of their available capital in one loan and to ensure that they don't contribute more than 25% of the total value of the loan," he adds.
Consumer market
The Somerset West company began trading in the consumer market in July 2012 and facilitates loans of up to R100 000, with repayment periods of two years or less.
The Barclays investment is a major fillip for the company. The deal, described by the two companies as worth 'tens of millions of rands', provides RainFin with capital to expand into new sectors of the lending market. More importantly, says Emery, the partnership with Barclays will enhance the company's expertise, client base, potential market and reputation.
RainFin will draw on Barclays' extensive lending experience to improve its credit scoring. The banking group will provide the P2P lender with welcome liquidity by granting loans to some of the borrowers on the platform. Emery adds that RainFin's P2P lending platform may in future attract capital from Barclays' investment banking business. Barclays benefits, says Emery, by getting an early foothold in the potentially lucrative P2P business as well as gaining access to highly attractive markets in South Africa and elsewhere in Africa. He's optimistic that RainFin's ties with Barclays will not deter other banks from eventually using its P2P lending platform to make investments.
Expansion
RainFin will not have an open run in the local P2P lending market. Yiba last year announced plans to enter the consumer P2P lending business but was unable to raise sufficient capital to enter the fray. However, African Internet Holdings, backed by international corporations MTN, Millicom and Rocket-Internet, launched the South African operation of the Lendico P2P lending business in April. Rocket-Internet operates Lendico businesses in Spain, Austria and Poland. Other contenders are likely to move into the local P2P lending market.
Emery says RainFin is moving quickly to establish itself in a variety of sectors of the P2P lending business. "We'll then know which markets are going to take off," he says.
RainFin began its expansion by moving into the loans market for small and medium-size enterprises in July. Small corporations are next in the company's sights. "Barclays is keen for us to set up P2P lending businesses in other African countries, particularly where it doesn't have much of a presence," adds Emery. These businesses will initially be confined to matching lenders and borrowers within the same country. Exchange control regulations are a major hurdle to cross-border lending. "We're looking at the problem. If we could solve it, we would be in nirvana," remarks Emery.
First published in the July 2014 issue of ITWeb Brainstorm magazine.
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