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Cumplo Case Solution
Peer-to-peer lending has a lot of opportunities, especially in countries where the financial markets remain underdeveloped and out of reach of working-class individuals and SMEs. Many have to resort to informal means of borrowing which are unregulated and have exponentially high costs (Lenz, 2016). There is a demand when it comes to borrowers who, in the case of Chile, were paying interest rates as high as 50%. In addition to this, many lenders, who according to Sheas’ research were only receiving rates of just 4% through the banking sector, could earn much better interest through P2P lending. There is a demand for such crowdfunding opportunities facilitated by the use of technology. P2P has the potential to fill a void within the financial markets and prove socially viable by providing an alternative to loans at usury rates.
Following questions are answered in this case study solution
What are the challenges and opportunities of peer-to-peer lending?
In what ways starting a peer-to-peer lender in Chile is different than starting it in the United States?
What did the Sheas miss?
What is wrong with the Sheas initial projections?
If you were the Sheas in October 2012 would you pivot to private mortgage insurance lending, continue with the consumer lending, or quit?
Had you decided to continue, would you fight the criminal charges?
Case Analysis for Cumplo
The major problem with developing a P2P platform is the lack of regulation or oversight present. Since technological intermediation in the financial sector is a fairly recent phenomenon, existing laws are insufficient. In fact, when existing laws are vague the issue is much more serious since competitors can use these laws to challenge the legality of P2P platforms, something Cumplo found out the hard way. The strong opposition from the financial sector, especially commercial banks, is also a major challenge since P2P presents an attractive alternative to traditional banking for both lenders and borrowers.
2. In what ways starting a peer-to-peer lender in Chile is different than starting it in the United States?
Starting peer-to-peer lending in Chile is drastically different from starting one in the US. The financial markets in the US are much more developed, they have financial depth. The entire financial sector is heavily regulated and oversight is present to prevent any shady business practices. In such an enabling environment the existence of innovations like P2P lending is welcomed rather than challenged.
In a country like Chile, where financial markets lack financial depth and customers have access to very limited options, such innovations do not do very well. This is especially true because borrowers’ credit score, which is the main determinant behind access to credit, is simply not available. Research shows that less than 50% of individuals in Latin America have a credit score (Lustig, 2019). This is why it is so easy for both the formal and the informal financial sector to continue with their predatory practices unchecked. Lack of information is a major hurdle to the development of the P2P platform which relies heavily upon accurate information which borrowers and lenders can use to make funding decisions. There is also the issue of lack of regulation which has given an unfair advantage to the financial institutions. Financial institutions operate with little oversight and have a monopoly due to the lack of consumer protection laws. Since the existing financial institutions harbor so much influence, any challenge to their dominance will be met with strong opposition. Whether this be by means of outright corruption and strong-arming or by means of exploiting legal and regulatory loopholes.
3. What did the Sheas miss?
The Sheas did complete the due diligence on their part. This included consulting with different lawyers, specifically those well-acquainted with the banking law. Since the business model of Cumplo relied primarily upon creating a marketplace for borrowers and lenders to facilitate the process and make it more feasible for all parties involved, it was concluded that the company was not infringing upon any existing laws. This, however, turned out to be a much more complicated issue. In the absence of any legal precedence and faced by a novel challenge, the banking association was able to raise objections against the P2P structure of the company. The banking industry in Chile had become extremely concentrated, with just three largest banks controlling 50% of all lending and earning two-thirds of all profits, after the financial stability measures taken by the government (ProMarket, 2017). This in turn created a powerful banking lobby, which colluded together to fend off a potential threat to the status quo.
The innovation Cumplo embodied presented a serious challenge to the banks’ operations. This is why they were prepared to fight against the legality of such a service as P2P lending. The banks were able to use a vague law in their favor. According to this law, any company holding deposits must be regulated under the banking law. Cumplo did not hold deposits, it did have virtual accounts of lenders as a guarantee to ensure that they did have enough funds to loan out. This, however, was contested by banks and regarded as a violation of the law which put Cumplo in legal trouble.
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