The Chimera was, according to Greek mythology, a monstrous fire-breathing hybrid creature of Lycia in Asia Minor, composed of the parts of more than one animal
Innovation, like evolution, takes on many forms. Though always present in financial and investing services, in the last ten years the pace of innovation in all industries has quickened due to technology, regulation and customer needs.
And when it comes to online lending, we are beginning to see an evolution in business models, as in-market experience begins to shape how businesses operate. The innovation will result in evolved organisations that take the best of both worlds.
Part 1: Interest Rates
As early as 2004, UK based Zopa, launched the world's first online peer to peer lending platform. A major part of its business model allowed marketplace participants (lenders and borrowers) to set rates based on certain rules, bids and an auction mechanism. In 2009 however, it moved instead to a table with fixed rates, based on credit scores, loan terms and amount.
In 2015, Funding Circle, the UK's largest online lender to businesses made the same move to fixed rates.
When the first platforms appeared, the proposition was based on true marketplace principles - where participants set rates, not the platform operator
The initial distinction made sense on two levels: (i) The idea of democratic finance, where individuals, not bankers decide outcomes, and (ii) create distance with banks, blamed for the global financial crisis.
So why did they change - to offer services that resembled the banks? We looked at advantages and disadvantages of each interest setting method.
Fixed Interest Rate Tables
(+) Simple, easy to communicate and - familiar.
(+) Predictable outcomes for all participants. No need to wait to see the final rate as with auctions.
(+) Knowing the rates in advance, allows the whole process to run at a faster pace.
(+) Favours lenders as funds are always committed once borrower agrees.
Using Auctions to Determine Rates
(+) Supports the idea of a marketplace, resulting in greater engagement levels.
(-) May result in "rate convergence" where auctions lead to overlapping rates even though credit scores / bands are different. Redundant complexity.
(+) Favours borrowers, who may be able to achieve lower rates
(-) Takes time and sometimes need to be re-run - Can frustrate unsuccessful bidders
Setting interest rates is core to lending and debt markets. As fintech matures, we see other examples of how the new will combine with the old to better customer journeys and value.
True innovation in online lending will not be based on how interest rates are set. Instead, the focus will be on better customer journeys. Transparency, speed, access and a range of products that for many individuals and businesses have been out of reach
In the second part of the series, we will summarise the challenges facing independent lenders and banks as they build online lending platforms. We believe addressing them will continue to blur the boundaries and give rise to an all together different breed of financial organisation.
Grow Advisors, Asia Pacific
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Grow Advisors is proud to support the transition to digital finance around the world. Our team offers consulting and professional services on online asset and wealth management solutions, lending and p2p, crowd investing and fund raising around the world. We are uniquely placed to cover both planning and executional aspects of all our ideas.