I was recently made aware of a company based in Toronto, that is spearheading the peer-to-peer lending business in Canada. Peer-to-Peer lending facilitates a lending system whereby people can borrow money directly from private investors who are both individuals and institutions, in a safe, structured and secure way. CommunityLend is the name of said company. CommunityLend offers borrowers an alternative to their banks and offers investors, albeit accredited ones, the opportunity to earn returns comparable to a number fixed income products. On the CommunityLend website, I found the following benefits outlined for Borrowers and Investors:
For Borrowers:
We create the opportunity to get lower interest rates on Loans, to be recognized for personal factors beyond just credit score, and to accept more flexible payment options, like early repayment without penalty.
For Lenders:
We create the opportunity to participate directly in the meeting of financial needs of others, to take direct control over building a portfolio of assets which match their Lenders investment criteria, and to participate in a different financial asset class.
Intrigued by this unique opportunity and company, I attempted to reach out to CommunityLend and offered Colin Henderson, the Chief Technology Officer and Co-Founder of the company to write a guest post with regards to the role of CommunityLend in the Canadian business landscape. Read on below for Colin’s missive.
Biography: Colin is a longtime banking professional. Colin took his first position in banking in his homeland of Scotland and has worked in England, Canada and the US. His extensive experience in the banking industry included positions in branches and headquarters, retail and commercial. Colin was instrumental in the launch of online banking in 1996 with mbanx, and the subsequent development of self service channels at Bank of Montreal (online banking, ATM’s, telephone banking, and branch investment). Colin maintains an active blog at The Bank Watch which explores banking and the web lifestyle. His education includes managmenent accounting and banking institute qualifications, both in Canada and in the UK. Colin is a strong believer in harnessing the power of the Internet, and in particular open source, to take us beyond simple automation of existing transactions and towards better capabilities to meet peoples’ needs.
Over to you, Colin …
Peer-to-peer lending has been around since the beginning of time. It actually predates banks. However while it works for small groups that remain in the same place, it did not work for modern times, and hence the evolution of the middlemen we know as Banks until some other things changed.
What changed was the pervasiveness of internet, and the connectedness of individuals on their own schedule. This first became clear with email and IM, then social networks of various types after 2002. The web evolved from a document processing environment to a communication medium.
We watched this evolution and saw the beginnings with Zopa and Prosper. With that CommunityLend set off to develop the vision for Canada learning from others (now more than 50 worldwide) and establishing the right way to build out the vision for Canada. After much work with the Canadian regulatory community CommunityLend launched in 2010.
Interest rates in Canada within traditional financial services vary between less than 1% to 29% for depositors and borrowers. There is a wide disparity between rates paid and rates received. At its core peer-to-peer lending would like to offer borrowers and lenders the opportunity to self regulate their rates to share in the disparity between deposit and loan rates, providing a win-win for all.
At CommunityLend we have designed the system to maintain customer confidentiality, yet provide the information needed to make lending decisions for our lenders. Lenders can see data such as credit rating, debt service capability, borrower stability and information about the loan purpose in the borrowers words. They can ask questions of the borrower and all lenders can assess the answers.
This provides the borrowers some degree of control over the process, while satisfying lenders for their risk assessment. The transparency of information is something that sets peer-to-peer lending apart from traditional securities.
Two key questions are often asked:
1. Borrower default: At CommunityLend borrowers are filtered to ensure only those with good credit ratings are included. Nonetheless risk of default due to circumstances will always exist and needs to be accounted for in lender decisions.
2. Scale – how can lenders place money quickly and yet retain the benefits of the system? First off there are facilitators of scale already built into the system to permit bulk purchases across lender pre-defined risk elements. Secondly as we gain experience we will build many more based on the learning with our early lenders.
In both cases of the above, we must compare to the old method of such investments which required buying into Asset Backed Commercial Paper (ABCP). ABCP had the benefit of certain promises associated with the offering institution but as government eliminates the right to set ABCP vehicles off balance sheet. This will impact the supply and price of ABCP. We would also note that such ABCP was priced based on the assessment of the offering institution. Peer-to-peer lending on the other hand makes visible the true rate paid by the borrower.
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