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Pros and cons of peer-to-peer lending: Sean Emery – CEO, RainFin

No loans for discretionary spending or, say, debt consolidation.

SIKI MGABADELI: Investors seeking higher returns than those offered by traditional banks and borrowers wanting lower interest rates than those usually offered by lenders are now meeting on an online marketplace. It’s called peer-to-peer lending. It’s reasonably new to South Africans and it’s a market that’s enjoying an upsurge globally.
   So to explain it all to us we are joined by Sean Emery, who is CEO of RainFin. Sean, thanks for your time this evening.

SEAN EMERY: Thank you very much for having me.

SIKI MGABADELI: What is peer-to-peer lending?

SEAN EMERY: In essence all financial supply chains are about borrowers who are looking for money and investors who are looking to invest money. Peer-to-peer marketplaces are choosing to try and take out the middleman of the financial service supply chain. In the past that has been a banking organisation which has stood between an investor on the one hand and a borrower on the other. Peer-to-peer platforms are trying to connect those borrowers and investors directly to one another without those middleman costs involved.

SIKI MGABADELI: OK. So how major could those costs be that are in the middle, which you are removing? I just want to get a sense of where the benefit is for both the borrower and the lender.

SEAN EMERY: Well, if you look at it from now, if you are a lender – in essence you are someone with some money and you want to lend it to someone else – the only thing you really have at the moment is to invest it in a bank. So you go to the banks and they might give you a return on your fixed deposit of perhaps, let’s say, 7%, which is a really good one at the moment, as I heard on the radio on the way here. So some banks are advertising for 7% if you go to them and you give them a deposit.

   On the other side, if you ever go to the same bank and you try and borrow money from them, the best they could probably lend it to you, as for you buying a house, is probably 10.5% or so. And normally if it’s unsecured, you would probably pay about 15% on that money. So really what you’ve got is a large spread between what banks are paying investors and what they are lending it out for. That’s at least 5 or 6%, that differential, which ultimately we call the costs of the financial middleman.

SIKI MGABADELI: All right. So this puts the two together at a cheaper rate. But we’ve had issues with lending in this country, we’ve had issues with consumers over-extending themselves. How do you protect the lender from that kind of consumer who might default?

SEAN EMERY: Excellent question. What it think is nice about RainFin and where we are starting now, we are really from scratch. So we have the normal application processes that borrowers would go through when they come to our platform. A borrower comes in, he applies, we give him his credit score, we show him where he is standing, and we do full affordability and moderation checks to try an create in essence a super-prime borrower on the platform. That means they go through normal checks and balances, we know who they are, w do all the collections and we make sure they are super-prime. We don’t want to have people on our platform that we make available and promote to investors whom we feel are going to default. We wouldn’t want that to happen at all on the platform. So we are very, very focused on the super-prime borrower at this stage.

SIKI MGABADELI: And what sort of people do you envision coming in to ask for loans? Are these loans to start businesses? What sort of loans are these for?

SEAN EMERY: Traditionally whom we’ve really focused on is people who might have had difficulty in getting loans from the financial services sector – not because they aren’t able to pay it back, but because they are probably self-employed or they’ve got their own business or they are getting off the ground. Most banks – the first thing they do is say “please show me your pay slip” and if you haven’t got a pay slip you won’t get anywhere in their process.
   We’ve realised that through our algorithms and our scoring techniques we are able to look at alternative sources of income, establish that those are real sources of income by looking at the bank accounts and say, well, this person is self-employed, they have got regular income coming into the accounts, they can afford it and let’s put them through a slightly bespoke loan process. We are really looking for people who are using this money to start a business, or using it to invest in something of your own – not for people who are choosing the money for discretionary spending or sort of debt consolidation type guys.

SIKI MGABADELI: So is this different from Wonga, then?

SEAN EMERY: Very different in that context. Ultimately Wonga is a very short-term emergency loan, very high interest rates, and not at all the marketplace that RainFin is on in that context.

SIKI MGABADELI: All right. Let’s look at how this has worked in other countries. This is done in the United States. I know of a specifically entrepreneurship-driven one where African Americans who tend to find it very difficult, for example, to access bank loans, lend money to each other via a similar platform. So in other countries is this a model that’s used?

SEAN EMERY: It’s a pure lending or marketplace lending [platform] as they are calling it. It is booming in almost every territory outside South Africa, as well as here. The US has got two major players and they are really doing exceptionally well. This year we are thinking that their peer-to-peer lending industry will lend over $3bn in this last quarter alone. What this means is exactly what you said when you said there it is something that we all have been doing anyway.
   So 80% of SME businesses in South Africa, which ultimately are small start-ups that get going, those entrepreneurs get their initial funding from friends and family in South Africa today. We are saying well, look, we know that sometimes it’s a bit risky to lend you money only to one person. There is a natural tendency for us South Africans to want to help each other out, but we can now do it through a platform where there is a bit of diversification, because you can come to the platform and you can say, right, I’ve got R10 000 but I want to lend R1 000 to 10 people. That helps me. It spreads my risk a bit. It helps a lot more people, and I can actually therefore make sure I make a good return as an investor, and not necessarily have the risk of one person being unsuccessful in paying it back.

SIKI MGABADELI: And what happens to defaulters, Sean?

SEAN EMERY: We have a default collection process which is standard, very similar to every financial institution process. We have to make every effort that we can to go and collect that process, exactly the same as if you were to default at a bank. We collect it, we go to litigation, we would potentially obviously list the people if they didn’t pay. But we make whatever efforts we can to ensure the people repay.

SIKI MGABADELI: All right. We will leave it there. Thanks for your time today, Sean Emery.

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