*This use case is a scenario from our partner GenTwo
Build a Peer to Peer Lending Product
Access to an innovative debt financing solution for institutions
How it works
Overview
Peer-to-peer lending describes the process of matching lenders and borrowers on a digital platform, bypassing traditional banks
P2P platforms offer lower rates to borrowers and higher yields than comparable fixed-income assets.
The worldwide P2P industry is growing fast in all major markets (US, China and Europe).
U.S. volume in 2014: $5.5 Billion → PWC forecasts a volume of $150 Billion or higher by 2025.
U.S. Loan origination volumes have grown at an average of 84% per quarter since 2007 (Source: PWC)
Growth is driven by several factors:
Growing interest from institutional investors looking for additional yield
Growth in emerging markets with higher loan demand in both business and consumer sectors
Technological progress with the implementation of smart contracts based on blockchain and AI technology (e.g. “Swisspeers”)
An alternative asset class
For the securitization of a basket of Swiss P2P consumer loans, an independent Swiss asset manager was seeking a solution offering him enough flexibility to effectively and actively manage his portfolio on behalf of his clients.
After consulting several banking institutions, it became clear to him that the securitization of P2P loans lies in conflict with the business model of traditional banks, which leans towards traditional direct credits. Furthermore, the strict terms dictated by those institutions did not align with the asset manager’s interests and did not offer an appropriate framework for the implementation of his strategy.
In stark contrast, RainFin's proposal for the securitization of the loan portfolio could convince the asset manager, with its emphasis on transparency and the elimination of bank balance sheet risk.
Through the setup of a flexible and bank-independent investment vehicle, the asset manager was able to implement his strategy and issue certificates on an attractive product to his network of institutional investors.
P2P Lending
Chances:
Attractive yields for investors in a low rate environment
Reinvestment opportunity: Steady cash flows with potential partial repayment of the loans before maturity
Cost-effective portfolio diversification through loan securitization
P2P loan interest rates are set by the originators acting like a rating agency
P2P loans are short- to medium-term (1-5 years) and showcase low duration reducing their interest rate risk
Challenges:
Institutional investors face one major obstacle to invest in this loan segment. The loan principal is often too small in relation to the investment size, which burdens the loan selection process. This translates into a higher deployment time and higher costs for these investors
Lack of track-record and low fungibility
Increasing regulatory scrutiny (e.g. China banning new P2P Lending platform to prevent fraud)
Credit losses may be evenly distributed among investors in the same rating class in case of a default on a loan platform
Advantages
Asset Manager
Full access to Issuance Vehicle
Distribution to investors
Off-balance sheet vehicle with transparent pricing
