Businesses from all industries are currently wondering what digitalization might imply for them and which conclusions should be drawn in order to remain successful in the market in the long term. In the financial services sector, P2P lending continues to be a trend for quite some time now and is consequently already covered by different start-ups.
In contrast to competing P2P lending providers, Bitbond relies on Bitcoins as technology and payment network. We had the chance to talk with the founder about their innovative business model, resulting opportunities and risks and the future of the Bitcoin technology.
Bitbond (founded in 2013) positions itself to clearly compete with the classic banking sector, as CEO Radoslav Albrecht explains in the following interview.
1. The idea that people can lend to each other without the need for a bank (peer-to-peer lending) is not new – what differentiates your service from other “classic” p2p lending platforms and what advantages can your customers expect?
“Classic” p2p lending platforms still use banks to process and execute payments. Therefore, the platforms provide a marketplace for borrowers and lenders but are still wholly dependent on banks.
This is where Bitbond differs, our infrastructure is completely independent from the banking system. We exclusively use bitcoin as a technology and payment network. This has many advantages. On the one hand it allows us to cut costs. Banks charge traditional p2p lending platforms a substantial fee for every payment they help process; these fees simply do not apply to Bitbond users. Lenders do not pay any fees, and borrowers pay a small one-time fee of 1-3%, significantly less than on any other p2p lending platform.
Bitbond offers another significant advantage in that we are a truly global marketplace. This would not be possible if we operated purely on Euros or Dollars. If, for example, investors from Europe, America and Asia wanted to lend money to a small business owner located in Argentina, then the costs of the bank transfers alone would make it an unprofitable investment. With bitcoin however, anyone can send digital money around the world in seconds, for an almost negligible fee.
Our independence of the banking system also gives us an added advantage in regions of the world where a vast number of people do not have access to basic banking services. In order to use bitcoin, you simply need a steady internet connection. The need for the traditional banking system falls away. Currently, around 56% of the world’s adult population does not own a bank account, and are excluded from many essential financial services as a result. Bitcoin can be a force for fundamental and positive change in this regard.
2. For some loans, Bitbond charges interest rates significantly above 20% and therefore – at first glance – more than a bank. How would you describe your target customers?
We specifically target entrepreneurs and small business owners. In the majority of cases, these are online sellers on platforms such as eBay, Amazon, and MercadoLibre. This global demographic is almost completely ignored by the banks. This is due to the difficulty of finding a reliable way to check and assess the creditworthiness of online sellers on such platforms. Banks have simply not found a way to do that yet. We use innovative methods which include, but are not exclusive to, an analysis of sales numbers, and customer feedback on their respective platforms.
Interest rates are higher because self-employed borrowers carry more risk than employed borrowers. Additionally, this demographic is notoriously under-served by the banking system. Thus, we are the only provider of this kind in many regions of the world. Finally, it is important to consider, that in many places such as Latin America and the USA, interest rates often lie well above those charged on Bitbond.
3. A number of new and innovative methods have been devised in recent years to accurately assess the creditworthiness of borrowers, by analysing their social media data for example. Which data points does your model use and to what extent is it automated?
Currently, our rating process is overwhelmingly still done manually. But we are working hard to automate the process as much as possible. We aim to have the process automated to 80-90% by the end of 2016. In order to meet this goal we are working on a machine learning project with the Computer Science department of Potsdam University. This project is focused on the analyses of key data points so that we can better identify risk markers, and subsequently create an automated risk assessment model around it. As soon as this project bears significant fruits we will base the majority of our credit assessments on this model.
4. Bitbond has positioned itself quite radically against the traditional banking system (“See no bank, Hear no bank, Speak no bank”) – to what extent will your technology fundamentally transform the way in which credit is allocated in the future?
I believe that we will see, in the retail sector, widespread adoption of the way we provide loans within the next 5-10 years. That means that customers will take out loans online and will be assessed and rated in an automated fashion by the lending platforms. I am also confident that current payment networks, such as SWIFT and SEPA, will be replaced by more efficient alternatives. I don’t think anyone can say for sure that this alternative will be bitcoin, but I truly believe it will be a digital currency because the advantages are so staggering.
5. What are the risks that investors and borrowers need to consider when engaging on your platform and what role does the price of bitcoin play?
The Bitbond community faces the same risks as users on other peer to peer lending platforms. Besides the credit risk, this also includes data security and privacy concerns. For this reason, we spend a huge amount of our resources ensuring the safety and integrity of our community’s data.
The price of bitcoin fluctuates quite considerably compared to traditional currencies. This is why most of the loans processed on Bitbond are denominated in US dollars. The few loans that are denominated in bitcoin, are usually taken out by bitcoin companies and traders, who would have little need for US dollars and are aware of bitcoins’ volatility.
6. What is your vision for bitcoin and what potential do you see in digital currencies?
I see two potential developments for bitcoin. In the “Windows” scenario bitcoin’s growing market capitalisation leads to an increasingly stable exchange rate. This would lay the foundation for bitcoin to become a strong and widely used global currency. In my opinion, this scenario would result in 10-20% of all financial transactions being done with bitcoin or an alternative digital currency.
The “Linux” scenario would lead to bitcoin becoming largely unnoticed by consumers. Nevertheless, banks and other financial service providers would use bitcoin to cheaply and quickly process transactions in the background. Similar to the Linux operating system, which is widely used but largely unknown among consumers.
Additionally, many new applications will be found for the blockchain, such as the proof of ownership for securities.
7. And finally: What is the next step for your product and where will Bitbond be in 5 years?
We aim to become a key player in the Small Business Loans industry. Once this has been achieved, we will be able to expand our services to include, for example, (secured) business loans to companies. Finally, we will allow investors to trade bond notes among themselves on a secondary market, making Bitbond a global marketplace for debt instruments.