Over the last several years, it has been impossible to ignore the disruptive force of blockchain technology and the digital transformation that has taken over the global financial markets. While cryptocurrencies like bitcoin may have dominated the headlines, blockchain has pretty much been the driving force behind everything.
Its impact on various industries has been so positive that even the lending market has taken note. While various startups have come up with intriguing blockchain-based alternatives for the lending market, they might take some time to gain enough traction in the market. Analysts suggest, however, that existing lending companies could benefit even more if they were to apply the same concept and try to reach out to the growing number of cryptocurrency users.
Some of the blockchain’s strongest marketing points include its ability to democratize markets and, given the way peer-to-peer lending platforms operate, they could do a lot better if they adopted the use of blockchain. This could result in companies like LendingClub Corp. (LC, Financial) and Hexindai Inc. (HX, Financial), which have experienced mixed performances since going public, expand their addressable market by targeting customers that hold crypto assets of some form.
Peer-to-peer lending is basically a form of unsecured lending. The lenders, who in this case are referred to as investors, loan money to borrowers directly without the use of an intermediary like a bank. This makes it a little bit complicated to use assets as collateral for loans.
With blockchain technology, however, borrowers can tokenize the assets they own and add them to the distributed ledger infrastructure to sell, trade or use as collateral for loans. Some of these assets may not qualify as collateral in the mainstream lending market, but with blockchain technology and through tokenization, assets such as patents, intellectual property or even branding can be tokenized and used as collateral for hard money loans.
In addition, borrowers are also likely to get better value for the assets provided as collateral if done via a blockchain-based network than in the mainstream market. Statistics indicate bankers always undervalue customer assets provided as collateral when giving loans. In the tokenized form, valuation of such assets is likely to be more global and reflective of the actual market value than a placeholder valuation a mainstream lender might attach to the property.
This will lure more borrowers to the peer-to-peer lending market, thereby growing the addressable market. Generally, peer-to-peer platforms try to spread the risk across several loans, which means investor money is rationed to different borrowers. This is another concept that has helped the peer-to-peer lending market continue to gain more investors.
This market will also benefit significantly if it can attract cryptocurrency traders to the platforms. By combining blockchain technology with their lending platforms, it links them with the growing crypto market. From the cryptocurrency trader's perspective, it means they can access loans at competitive rates and use their cryptocurrency investments as collateral.
There are companies that have already launched this type of service. SALT Lending, which allows cryptocurrency traders to use their investments in the market as collateral for loans, is a perfect example. However, analysts suggest peer-to-peer lending platforms that are already established could do even better since their profiles are already proven as good alternatives for sources of loans in the credit market.
Therefore, the likes of LendingClub and Hexindai will benefit from taking advantage of the opportunity and boosting their top lines by addressing this new and exciting market.
One of the biggest challenges for peer-to-peer lending platforms has been the fact they do not take customer deposits. This limits their ability to generate more revenue because they cannot play the similar role of an intermediary that banks play in the mainstream lending market, which helps them generate more revenues from the net interest on loans collected.
Disclosure: I have no positions in any stocks mentioned in this article.