The press recently reported (extensively) Jamie Dimon’s - CEO of JPM Morgan Chase - warning to shareholders that tech based start ups are targeting the working methods and hegemony of the traditional banking model. An article in the Economist reported that fintech companies attracted $4billion of investment in 2013, which increased to $12billion in 2014. In May this year, the Maltese press reported that Maltese promoters raised over €318,000 through Kickstarter, a fintech platform.
Is this the Holy Grail?
Not all P2P lenders operate in the same way - a prevailing fintech model however is providing a digital platform which matches lenders’ need to invest in loan receivables and borrowers’ need for obtaining funding for their respective purposes. At a glance, peer-to-peer lending (a plethora of other names have been used - crowd funding and social lending being just two) presents a win-win situation for all stakeholders (other than credit institutions, maybe). One of the fundamental competitive edges which fintech companies have over the more traditional lending institutions is that tech based P2PL companies have drastically lower operational and regulatory costs when compared to lenders under the conventional banking model. Seen specifically from a lenders’ investment perspective, an inherent advantage for the lenders is that interest rate on loans granted in the P2PL model exceed any interest which may be derived from more traditional term deposits and savings account. Borrower upsides include less bureaucracy, likely less conservative lenders, decreased loan related fees and potentially unsecured lending.
As lawyers, one of the main issues which we are required to address is potential licensing of P2PL models. Questions inevitably arise as to whether a lender who regularly or habitually lends to borrowers in Malta through a fintech platform is licensable in terms of the relevant local laws and regulations (in this respect, it is relevant to note that in models reviewed by us, fintech platforms do not themselves lend funds and are not party to the lending agreements between the funders and the borrowers); to what extent is the platform providing investment advice in matching lenders and borrowers (platforms usually mention in their terms that they do not endorse projects); status of equity based crowd funding; and whether a platform may be providing payment services. Depending on the nature of the borrower, P2P lending may also give rise to consumer credit issues which would also need to be assessed within the wider P2P context.
It is still early days but P2P lending may stay around for the foreseeable future. Maltese laws and regulations are not tailored to cater for such activity but that in no way means that the activity should be shunned. To the contrary, the activity should be promoted and facilitated through legislative measures which are to be updated to specifically promote P2P lending whilst safeguarding borrowers and investors alike.