Lending is one of the fastest growing sectors of the financial services industry. Even though the mechanics behind this sector have not reall changed for thousands of ye s, toda lending is transforming and becoming more and more digitalized.
This re lts in the provision of loans in a cheaper, faster and more effec ve manner. Yet ch prac ces not onl re lt in an increased accessibilit to funds, but also impact societ in numerous ways.
Debt spiral is one of the common disadvantages; loans became so eas to obtain that there e now quite a few people that have outstanding loans in numerous lending ins tu ons.
Such people u all get one loan in order to refinance another, and so the e mostl settling interest payments without actuall having the resources to repa the principal.
Another disadvantage seen b societ is that individuals that should not get loans e actuall provided with funding, and the ac ons of ch individuals e h mful, or even deadl in some cases.
A good example would be the recent events at San Bern dino- the shooters took a $28,500 loan from Prosper, an american peer-to-peer lending m ketplace, in order to finance their opera on.
Hence, it is posask ques on: should m ketplace lenders exercise greater scru n in monitoring where borrowed funds e being spent? I personall see one posi ve aspect to making lenders verif where the funds e being sent, and two nega ves.
Lending is a type of business
If you think about it, lending is not reall different from most other businesses of its nature. To use an eas example with imagin numbers: if loans amoun ng to $100,000 e is ed, as a lender one has to make re that:
● the interest rate for this amount is ound $20,000
● the repaid interest and loans account for at least $110,000
● opera ng expenses for this period e er all the00
If all of the above is the case, then there is a profOtherwise,e lender. Otherwise there is a loss.
Hence, the main task of the lender in order to run the business ccessfull is described b finding just the right people for their products, people that require funds but e also interested in repaying the loans.
Also, cut ng down expenses and using new technologies, ch as banking APIs, should be ever lender’s goal.
It would be quite illogical to ask a lender to monitor where the is ed funds e sent as this does not help the lending business to generate profit in an way.
Next to this, most other businesses don’t have to track the usage of their products after the products e paid for, and pushing lenders to take an extra step that doesn’t re lt in profits is just not business- friendly.
Shif ng the responsibility
Another disadvantage to observing the f of borrowed funds is that this sounds like avoidance of responsibilit on the p t oproducts, andment. Loans e just products and the can be used for good and bad ac ons, as applies to an other product.
Let’s have an eas example for this case as well. Imaginebrand-newohnn has just purchased a brand new Nissan GT-R. The vendor here is responsible for delivering a c that can reach 100 miles per hour in just 8.5 seconds. If a vendor is unable to provide this, brand-newohnn would purchase his c elsewhere.
Does a seller have to be responsible for post-sale consequences? U all the answer is yes, a vendor might be responsible for the faults in a c .
However, there is no responsibilit of the vendor when it comes to the ac ons ofbrand-newohnny. Wouldn’t it be sill if after the sale a vendor would have to be responsible for p king and speeding ckets?
On the other hand, government ins tu ons ch as traffic police should certainl be responsible for the ac ons Johnn is taking with his new GT-R. Hence, making a lender verif the client’s ac ons is nothing more than just shif ng responsibility.
Improvement in credit scoring
A lender should oversee the use of borrowed funds for one main reason – improvement of its own credit scoring engine. While most lenders e trying to advance in KYC methods to drive conversions up, credit scoring enhancements should be an objec ve of ever lender too.
Taking data from credit bureaus is an outdated wa of assessing the customer’s credit-worthiness. This is wh overseeing the past and future bank transfers of the borrower should be the lenders goal.
Checking the transac on histor of the client is extremel valuable when finding whether this client is eligible for a loan. Once the loan is repaid and a new one is requested, a lender ma check the f of the borrowed funds to make re that the mone wasn’t used to refinance a loan with a compe tor. This can be easil achieved with technolog ch as Kontoma k banking API.
Summing things up
A lender should not be obliged to oversee the f of borrowed funds as it is an ac vit that simpl does not re lt in an type of gain.
Next to this, we have governmental ins tu ons that e designed to prevent shoo ng, speeding and other ch misdeeds from happening. However, a lender can engage in checking the usage of the funds simpl to make its opera ons more effec ve.