Market Overview

Why Crowdvouching Is The Future Of Micro-Financing

Why Crowdvouching Is The Future Of Micro-Financing

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Why Crowdvouching Is The Future Of Micro-Financing

The idea of peer-to-peer lending (P2P) was just perfect, and it seemed people could finally lend money to others without clumsy and costly financial institutions involved as intermediaries. P2P platforms, however, were not able to successfully deal with regulatory pressure, and had to give up the idea of direct-user interactions. In 2008, the SEC forced the largest market players to go public with their securities, and this has led to a situation where investors were no longer financing borrowers directly. Instead, they had to buy medium-term bonds backed by loan repayment notes. 

How to remedy this situation? Enter crowd-vouching, which allows you to make a profit immediately, and you will only have to put money out later if the loan is not repaid.

What is crowd-vouching?

Crowdvouching model

Crowdvouching is the practice of financially securing a loan repayment by vouching for monetary contributions from a large number of people. Unlike P2P lending, Vouchers do not lend money directly to the Borrowers but guarantee to repay the loan to the Lender in case of Borrower's default.Vouchers act as a collective mind in order to determine whether to approve loans or not. Liability for each loan is divided among all Vouchers. Each Voucher approval serves like an insurance of the loan capped at $10 USD. Since the vouching range is between $2 and $10, each Borrower needs to find dozens of Vouchers provided by Suretly platform. In order for the loan to be approved, the entire loan amount should be guaranteed by the Vouchers.

What are the benefits of crowd-vouching?

No cost for investors. The major difference between crowd-vouching and P2P-borrowing is that investors or co-signers on crowd-vouching platforms do not loan any money to anyone. They do not buy securities either. What they do is act as dozens of co-signers, who guarantee to pay part of the borrower's debt in the event of a default. At the same time, investors receive compensation, depending on a borrower's credit rating.

Distribution of risks. As in P2P-lending, investors co-sign only for a portion, but not the whole amount of a loan. Each borrower should get several dozens of co-signers. Only in this case is he guaranteed to get a loan. At the moment, crowd-vouching technology is tested on short-term loans (up to 30 days), which are more profitable for investors but assume a higher level of risk. However, the risk is distributed between several investors.

Quick return on investment. Compensation to investors in most cases is paid out of the loan amount. They can receive their profit the day after a loan is issued to its borrower.

No costs are paid by investors. A licensed financial institution (bank or another organization that is authorized to issue loans) acts as a direct lender. The crowd-vouching platform is, in fact, the marketplace. Acting as an interactions administrator for all parties involved, it assumes 100% liability to recover money from investors in the event of the main borrower defaulting. 

Lower borrowing rates. Minimizing risk lightens investors’ needs to incorporate higher interest rates to cover potential defaults and expenses working with problem borrowers. The rates will be minimal for borrowers. Yes, you will have to cover the costs for investors’ compensation. But, for borrowers with high credit ratings, these costs are going to be insignificant. 

Anonymity. A borrower’s personal data is not disclosed to investors – they have to make their decisions solely on the basis of profit/risk ratio evaluation. Data remains undisclosed even in the case of a default. Situations where an angry investor can start procedures for independent recovery of money lost are practically excluded.

Good opportunity to improve credit history. People with less than perfect credit history, so-called subprime borrowers, are worthy of separate consideration. According to CFSI, 121 million Americans, which count as almost half of country's population, have a FICO score of fewer than 600 points. This means, that they are locked out of access to traditional bank loans. Where else can these people borrow any money?

Low default rate. Collective responsibility can affect the default rate, even in groups of people who don’t know each other. As demonstrated over 4-months from crowd-vouching test results in Eastern Europe, the default rate is significantly lower than in other credit products.

I’m not sure if crowd-vouching can replace P2P lending completely. However, the marketplace requires new financial instruments, which can more efficiently solve the problems of interaction between borrowers and investors. Crowd-vouching is definitely going to become one of them. 

Posted-In: contributorFintech

 

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