… FinTech companies are known for their success in payments but the first one I ever met, Zopa, focused on lending… Their platform was immune to regulations, however, because it connected people with money to people who needed money instead of loaning money themselves.
We know this as peer-to-peer (P2P) lending now but, 15 years ago, it was unheard of… The idea behind P2P lending is to unleash the power of technology to minimise the interest rate spread between saver and borrower.
A bank takes deposits and lends them through buildings with humans; a P2P lender does the same, but through software, servers and an algorithm.
When you remove the huge overhead costs banks have, the FinTech firm doesn’t have to take a cut as large. Hence, savers get better returns on their savings and borrowers get lower costs to borrow.
However, as FinTech firms mushroomed across the world, countries soon realised P2P lending had to be regulated like any other form of financial service and credit: You have to ensure the risk is adequately covered.
… When the UK firms like Funding Circle, Zopa, Ratesetter and others were getting off the ground, they create an industry self-regulating body – the Peer-to-Peer Finance Association (P2PFA) – and reached out to the regulators to be regulated.
This model has seen more than 1,600 FinTech firms operating in the country with the industry acknowledging the importance of regulation in this growth.
When Lending Club started in America in 2006, founder Renaud Laplanche, met key federal regulatory authorities in all American states.
Although the company will no longer operate as a P2P lender as of Dec 31, Lending Club’s forthcoming engagement with the regulators has helped create an environment that has helped the US FinTech industry flourish.
It is important to view the latest salvo between China’s regulators and the P2P sector, which led to the Ant Group suspending its IPO, in this context. Ant’s IPO was hugely exciting. It was subscribed to by more than 80 times expectation, valuing the firm at over US$350 billion, making it bigger than JPMorgan Chase – the most valuable bank in the world.
…Broadly though, the trend seems to be for greater regulation to manage the industry with regulatory hurdles in some countries in the region proving to be onerous.
… the bottom-line is that FinTechs will become more like banks.