FinTech: New Crisis Rising?

Financial service sector nowadays is experiencing what Greek philosophy and ideas have experienced during the Middle Ages – the Renaissance. And it is driven by FinTech.

Lower rates, enjoyable user experience, wider scope, simplicity – these are only several out of many benefits that were brought to the financial sector in the last couple of years. And the innovation is still taking place.

Can FinTech be a remedy to the financial crises as such?

What I would like to focus on is the P2P lending model, which once again was introduced by the FinTech wave. And the interesting question here, which was also raised in the Forbes, is whether P2P lending could have prevented the recent financial crisis? Or put it more broadly, can it be a remedy to financial crises as such?

Let us take a brief look here. The key underlying thing behind the lending business in which commercial banks participate is the fact that they do not risk their own money. Rather, they risk their savers’ money, or simply lend out the deposits they receive. This is their core business and the main profit generating activity.

Generally, commercial banks are willing to take higher risks since they lend out their depositors' money.

Hence, typically the bankers when granting a loan have little at stake (at least personally). Of course, there are business interests, there are various regulations imposed by the Central Bank, but generally speaking they are willing to take higher risk since the money they lend out is not their personal savings.

On the other hand, if we would look at the P2P lending business model, it is the exact opposite. Here the lender is the individual, which bears all the risks when pouring his/her savings into P2P marketplaces.

We may argue that if P2P lending would have been prevalent 10 years earlier, it could have prevented the sub-prime mortgage crisis.

Following this line of thought, we may argue that if such a business model would have been prevalent 10 years earlier, it could have prevented the sub-prime mortgage crisis. The key rationale behind this is that housing prices at that time rose at a higher rate than the interests for mortgages. Hence, more and more money was poured into the housing market, which has caused a huge bubble that eventually busted.

On the contrary, if P2P would have been in place, the individual lenders seeing rising housing prices (and probably thinking about buying a house or an apartment in the future) would be prompted to charge higher rates respectively. Thus, it could mean that such an alternative would be a certain safeguard able to prevent a surge of the bubble, making mortgages more expensive.

Of course, all of this is very general and based on various assumptions. Much more is needed to be done, especially in the regulation framework. Nevertheless, I see a potential here and look forward to experiencing a shift in the lending business.