CommonBond, Inc. – Profitability with Purpose

Posted bydpkbaliPosted inUncategorized

Anand Kumar, a young mathematics marvel from India, was once given an opportunity to study at one of the most prestigious schools of the world, University of Cambridge, after publishing a paper on number theory on the Mathematical Spectrum and Mathematical Gazette (1).  After receiving this prestigious offer, Anand went to multiple sources including the Bihar Government and Delhi newspaper offices in India to raise funds for his education (2).  Unfortunately, Anand was unsuccessful. His financial position did not allow him to pursue his dream of becoming a mathematician at a top tier university.  Upon this rejection, Anand continued to live in a world of poverty but later turned his life around by opening a world famous Super 30 program, where he prepares thirty under privileged students in India to get admission into the top engineering school in the world, IIT (3).

Anand’s story, one being analyzed by many, poses the question, how many other brilliant minds in the world have been rejected of world class education due to financial constraints?

Although this may be a rhetorical question due to the limited information available, one thing is definite, financial constraints are a limiting factor for individuals in developing countries, as many individuals cannot afford to visit traditional banks.  Additionally, for individuals who have access to traditional banks, the cost of borrowing can range anywhere from 10.35% – 14% plus foreign exchange fees (4).

Peer to Peer Lending Solution – CommonBond, Inc.

CommonBond, Inc. is a decentralized peer to peer lending platform which helps to solve this problem specifically for educational loans (5).  CommonBond, Inc. operates as a typical peer to peer lending platform, essentially an innovation which has disrupted traditional banking intuitions. The platform facilitates the connection between borrowers in need of funding with investors looking to gather funds (5).  At a high level, peer to peer lending platforms provide value to investors through the following means (6):

  • Access to borrowers:  a vehicle for investors who are looking to obtain higher than market returns through the investment in students (generated clientele)
  • Credit Risk Assessment: a comprehensive analysis of the risk rating of borrowers given their past credit history
  • Debt collection:  in the event of a default, peer to peer lending platforms provide resources to assist in the collection of debt
  • Legal:  ensure that all legal aspects of investments are covered with minimal risk

From a borrower’s perspective, peer to peer lending platforms provide the following benefits (6):

  • Access to investors:  a platform which allows borrowers to directly connect with investors who are looking for above market returns
  • Streamlined process:  peer to peer lending platforms provide an operationally efficient method to request a loan
  • Reduced interest rates:  through the removal of traditional banking institutions (middleman) between borrowers and investors, it makes it possible to provide lower interest rates to borrowers

With this business model, peer to peer lending platforms generate revenue through collection of transaction fees (listing fees & loan delivery fees), and margins which are built into the loan repayments of borrowers (7).

Risks of Peer to Peer Lending

The risks involved in peer to peer lending, specifically for educational loans, lies primarily with the investors who are putting forward large sums of cash for students. The three major risks to these lenders include (8):

  1. Credit risk:  when borrowers are unable to pay down the debt that is issued by lenders.  To combat this, lenders resort to receive their funds back from the peer to peer lending platform.  In unusual times and smaller peer to peer lending platforms, these platforms are unable to payback debt, in which case the investor has lost a significant piece of their portfolio.
  2. Risk of bankruptcy:  when a peer to peer lending platform cannot sustain the amount of debt that has been accrued and is unable to operate the business due to lack of funds.  This is the worst-case scenario for lenders, as they now must deal directly with borrowers to retrieve their investment.
  3. Risk of fraud: with the increased use of technology, it is more possible than ever to commit digital fraud over peer to peer lending platforms.  In the event of fraud, it is difficult for investors to retrieve their initial investment.  Generally, the peer to peer platform will foot the bill or the underlying insurance coverage of the platform will cover these losses.

Future of Peer to Peer Lending – Blockchain

With the introduction of Blockchain, another decentralized platform which is an “open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way” will most likely be the future underlying technology which will power peer to peer lending platforms (9).  Specifically, for peer to peer lending platforms which offer educational loans, blockchain functionality such as the use of digital signatures, smart contracts and open ledger will be used to perform multiple functions: validate student identity, maintain historical records of loan defaults, confirmation from universities on admission, and enable secure payment transfers from the lender to the borrower.  

Figure 3: Future Peer to Peer Blockchain Revenue Model (10)

Blockchain would provide further benefits to both investors and borrowers through cost reductions, process efficiencies, quality of transactions, and visibility of all transactions happening within the value chain of granting an educational loan (11).

Social Impact

Ultimately, through the use of a decentralized peer to peer lending solution, companies have the opportunity to not only make profits but also have a social impact that can revolutionize the world.  Envision – if Anand Kumar had access to CommonBond, Inc. and graduated from the University of Cambridge with a degree in mathematics, what groundbreaking applications of number theory would the world be exposed to?

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