Blockchain Technology for P2P Lending

Blockchain Technology – How it can help in revolutionize P2P Lending Industry?

Can you trust everything on its face value?

Suppose you are buying a “Made in France Perfume”, how can you be sure about its originality?

Well, the seller may add a tag of “Made in France”, but do you mean nobody will sell counterfeit products by using such labels?

A company can use a unique code system to preserve the originality of the product, but that’s not always economical. And sometimes, even that can’t be full-proof.

You may probably require someone who can certify the quality and genuineness of the product.

If the record keeping is improper, even such quality assurance certificates can be forged and compromised.

Therefore, you may need a system where a buyer can track the record of events in the entire production and distribution cycle in chronological order through a transparent platform—right from the procurement of raw materials to the point of sales.

“Is it possible?”—you may wonder.

Yes, it’s possible.

This can be achieved through the revolutionary blockchain technology—something that is going to transform our lives in coming years.

If the internet helped people connect with one another effortlessly, the blockchain technology would facilitate the trade and transfer of assets.

Let’s unblock the blockchain…

In simple words, it’s a database shared on an open infrastructure. The “blocks” typically record transactions which are locked with a code. Blocks are cryptographically connected in a series. This creates a transactions history that is visible to the people using that open infrastructure.

Imagine this…

A person living in a neighboring state touch based with you and showed interest in buying out your property. Would you be comfortable in dealing with him/her instantly?

Of course not, at least until you know that person well or get good feedbacks about him/her from trusted sources or have someone in your acquaintance who knows him/her well.

But the blockchain technology would facilitate such deals.

Are you wondering how?

By ironing out uncertainty.

The biggest advantage, in this case, would be tampering of land records would be impossible thanks to the blockchain technology.

Now assume, there’s a decentralized database that keeps a record of all transaction between both of you.  This will ensure there’s no manipulation of data in future, as all the entries are recorded in the chronological order and would need to match in all ledgers of the decentralized database.

In other words, the same version of the transaction is recorded in all ledgers of the database. Meaning if somebody has to hack the database to tamper with the entries, one will have to hack multiple systems at one go and change all the records simultaneously. Though not entirely impossible, this is tough.

Blockchain technology enables safer, faster and economically effective digital transactions and transfer of assets.

Blockchain technology and Peer-To-Peer (P2P) lending:

As you must be aware P2P Lending platforms, allow borrowers to list their loan proposals and investors to explore investment opportunities. In the entire process, banks are bypassed.

Moreover, the P2P platforms provide you with the complete credit analysis of the borrower. Doesn’t that act as a confidence-booster? Additionally, the borrowers and the lenders on the platform enter a smart contract with one another to minimize the risk.

That being said, for the transfer of funds, borrowers and investors are still using the banking channels. Investors directly transfer the money to the bank account of the borrower, and then the borrower manually confirms the receipt.

Before the blockchain technology transfigures the P2P Lending industry into one of the frontline industries in the financial sector, a few reforms are needed. 

There’s long-standing demand that RBI should come out with prudential guidelines for the P2P industry. And also allow the P2P Lending platforms to hold escrow account for routing all fund transfers through that account. The blockchain technology will ensure that all transactions are recorded at the real time and in the chronological order. Tampering the database and siphoning off funds would be next to impossible for anyone, including the platform itself.

Allowing P2P Lending platforms to operate through an escrow account will save a lot of cost, time and effort.

i2iFunding believes, as, and when RBI issues the guideline for the sector, institutional investors will start looking at the P2P Lending industry as an alternative to channelize their funds or the funds under their management.

The combination of blockchain technology and big data will change the way loans are appraised, disbursed and repaid, over a next few years.

However, there’s a silver lining. Not all jobs can be automated completely. P2P Lending platforms that understand how to make the intelligent use of technology will always have the edge over their peers.

i2iFunding is of the view that, work that demands cognitive abilities of humans shall be best left to humans. Technology is always an enabler