Steven Uster is co-founder and chief executive officer of FundThrough, a marketplace lender that provides loans to small businesses.
Peer-to-peer lending may be the biggest innovation in financial services since the invention of the ATM. P2P lenders offer what is often referred to as a marketplace platform that matches borrowers with lenders who get access to a new asset class: small business or consumer credit.
Through these platforms, lenders invest in loans and earn a return greater than their bank savings account, while borrowers gain quick access to capital at a risk-appropriate rate.
Marketplace platforms make economies more stable by eliminating the "too-big-to-fail" risk associated with traditional banks. These platforms have no leverage and no balance sheets. They simply facilitate borrowers and lenders coming together.
P2P also makes the economy more liquid and fair. Peer lenders increase borrowing capacity by providing a broad range of investors to fund loans, improving the availability of credit for high-quality but underserviced borrowers.
For example, new Canadians overindex in small-business ownership yet underindex in loans from traditional banks. Through marketplace platforms, they can now access the capital they need to grow.
Marketplace lenders are more efficient than traditional financial institutions. Why is it that a small-business owner who sells to Wal-Mart or other similarly high-quality companies often can't get working capital funding at reasonable rates, if at all? Why is it that a prime-quality borrower pays 20 per cent to hold a balance on their credit card? Meanwhile, investors are earning almost nothing in their savings accounts. P2P platforms are able to price loans more efficiently, and therefore more appropriately, for borrowers.
Although prevalent in the United States, Britain, Europe and Australia, marketplace lending is a new and unproven concept in Canada, and therefore has few specific regulations.
In order to foster innovation that will benefit all stakeholders and the Canadian economy as a whole, regulators should focus on four areas as they consider regulating this game-changing industry.
First, adopt a presumption of permission, instead of a presumption of prohibition. Former U.S. Treasury secretary Larry Summers recently compared the evolution of marketplace lending to the evolution of the Internet. When the Internet was starting to take off in the 1990s, U.S. president Bill Clinton created a task force of advisers to make recommendations on how it should be regulated.
After much debate, they decided that as long as basic principles on privacy and illegal activity were adhered to, the government would step back and let the Internet develop. A similar approach would be appropriate with marketplace lending.
Second, insist on full transparency and disclosure and then let borrowers decide. Regulators should insist on a standard presentation of rates, terms, structure, fees and prepayment penalties across platforms.
Borrowers need to clearly understand what they're signing up for and what their recourse is, and should then be able to make their own decision based on business or personal needs.
Lenders should have full access to data and the ability to diversify portfolios in order to make investment decisions with confidence that the data being presented are accurate and free of manipulation.
Third, maintain a level playing field that avoids granting incumbents an unfair advantage and encourages new entrants. In doing so, though, regulators must avoid creating unfair regulatory arbitrages. New entrants must adhere to the same usury, fair-lending and disclosure regulations currently in place to protect borrowers.
Finally, provide a workable and understandable regulatory framework. One of the biggest hindrances to innovation is ambiguity. Regulators should avoid creating overhangs of uncertainty that hinder those who seek to innovate in an industry that badly needs it.
If regulators adhere to these basic principles, borrowers, lenders and society will benefit immensely from marketplace lending.
Over the next generation, business and individual borrowers will consume financial services differently than they do today, as long as regulators don't hinder innovation.