RainFin hopes to disrupt SA’s financial services sector by allowing credit-worthy South Africans to engage in person-to-person lending, cutting out banks in the process and offering higher returns to lenders and better interest rates to borrowers.

Sean Emery, cofounder and CEO of RainFin, says the company’s online platform links people who need to borrow money with people who have money to lend. He says borrowers can access funds at lower interest rates and with better terms and conditions than they could through a bank.

Emery says borrowers may be able to get interest rates as low as half of those offered by traditional banks. Lenders, meanwhile, can achieve “superior returns” on money they loan to others. He calls it “social lending”.

“Lending is making the wrong people rich and the wrong people poor,” says Emery. There’s an important distinction between “crowdfunding” and “social lending”, he says. The latter is a subset of the former and sees a group of people engaging in transactions while sidestepping traditional intermediaries rather than pooling resources to create a product or fund an event.

Emery says the social lending model is likely to meet a receptive market in SA because there is a well-established stokvel sector, which he says is essentially an offline “peer-to-peer industry worth R44bn” involving more than 11m members.

In order to use RainFin, consumers must be older than 18 and resident in SA. The site employs a thorough credit vetting process, after which borrowers can apply for loans of between R1 000 and R75 000 using the RainFin marketplace.

Borrowers can specify the loan amount, the maximum interest they are willing to pay and the loan duration they prefer. The maximum repayment period is a year.

Individual lenders, meanwhile, can invest between R100 and R500 000 in the service and spread it across numerous loans. Investors are not obliged to lend to groups or individuals and have access to anonymous credit risk information based on factors such as age, gender, location and credit score.

RainFin earns a percentage-based transactional fee on every loan that takes place. Emery says this makes the costs of the platform “completely transparent” to its users. There is a 2% origination fee charged to the borrower and a 1% fee to lender for managing the transaction. Thus, the service takes 3% of a transaction’s value, added to it.

“We believe that consumers have an opportunity to take back some of the power they have given to banks, benefitting each other rather than large institutions in the process.”

Emery says RainFin intends to add other products to its offering, including financing for small and medium-sized businesses and mortgages in coming months.

“We expect to deny as much as 80% of applications in the early phase,” he says. It’s crucial that the service creates a strong, trustworthy base at the outset so that investors feel there are significant protections in place and that it is reliable. He says this should also result in better rates in the long run.

Hannes-van-der-Merwe-280 — Hannes van der Merwe

The service is aimed at two types of borrowers. The first are highly creditworthy borrowers who want a better return on investment than they get currently.

The second is the first-time borrower or a borrower that is shunned by the formal banking sector because of their age — whether too young or too old — or because they are freelancers, students or entrepreneurs.

At launch, the service is designed to handle up to 100 000 users. Emery says there are no plans to launch the service outside SA on account of the banking regulation complexities that would entail. The service doesn’t require a banking licence because it doesn’t take deposits.

“Like an estate agent isn’t a bank, we aren’t either. We don’t take deposits and reinvest them for profit; we merely facilitate the moving of money between people,” says Emery.

Cofounder Hannes van der Merwe says RainFin is not a micro-lender. “We are not trying to extract as much money out of you as we can.” He says one of the challenges the service faced was designing a process that would allow users to engage in a legally binding contract online.

Users are required to provide a wide range of personal information and documentation and are required to sign a loan agreement that outlines the rates and terms of the transaction. Borrowers have to sign a contract before any funds are moved between parties. A third-party timestamp authority monitors and logs the transaction for security’s sake.

Van der Merwe says the checks constitute a full Financial Intelligence Centre Act (Fica) check and the service will only pay funds into a verified account.

RainFin uses a third-party trust account with First National Bank that receives and makes payments between lenders and borrowers.

Emery says the reason borrowers must sign a contract before a deal is technically entered into is it makes securing a lender easier as it provides the necessary guarantee and allows the service to pair a borrower with an appropriate lender more quickly.

Lenders stipulate the interest rate they are prepared to accept and, in the case of two or more lenders offering the same rate, the first to bid on a loan request wins it. The service warns lenders if it appears a lender is taking on too much of a loan and inadequately spreading their risk on the service.

Van der Merwe says lenders can be kept up to date on new loans coming into the marketplace via Web feeds. Alternatively, the service includes an automatic “bid agent” that will bid on loans that meet specific criteria or notify you of it via e-mail.

Emery says the bulk of the service’s marketing will be done online, as that is where its audience is. “We are focused on using the mediums in which we operate, so online, mobile and social networks to start with,” he says.