Residual Token, Inc., our company, has designed a universal loan secondary marketing platform, and in 24hrs developed a small sample of the platform's potential. Our platform takes away the monopolistic secondary market for loans from a few global players and grants it to everyone in this room and around the world. The result is greater community participation, democratization of the secondary loan market and lower interest rates for consumers.
Our platform considers data privacy and protection, encrypted data analytics, information sharing, pricing, community participation and ratings.
The promise of financial freedom is not easily realized. Student loans, auto finance, personal loans and credit cards can provide capital to meet immediate money needs. Lenders take advantage of that need by charging interest, but where does the rate they charge come from? Our 20+ years of consumer lending experience provides some clues.
Lenders primarily use two sources to determine interest rates. The first source is their own costs, including: costs of debt, customer acquisition costs, origination expenses, servicing requirements and profitability metrics. Lenders also consider what the market will bear as indicated by what the competition is offering, and by what similar loans are selling for in secondary markets. We understand that most loan originators are not in the business of holding debt to maturity. Instead loan originators have specialized themselves to the point where they try to make good loans, and then sell them to investors that simply want the cash flows (without the headaches).
The problem is that today no efficient market exists to trade debt. The current markets are centralized, closed off from public participation, and largely opaque to the few who can participate.
2018 Top 5 bank loan originations excluding auto, credit card and student loans was $3.8Tr. This represents about 40% of the market. The total market for all U.S. loans originated in 2018 likely approaches $10Tr, and total secondary trading markets for loans is likely in the $1Tr to $2Tr range per year. This leaves personal debt and about $8Tr per year in other loans available for trading but with no cost efficient way to facilitate.
Residual Token, Inc. solves this problem by allowing loan originators, debt holders (including you!) and investors/buyers a forum to post partially encrypted loan pools for potential buyers to review, price, bid and show interest. Loan originators become sellers and together with buyers may take the conversation offline to exchange updated, confidential information and negotiate loan purchase and sales.
Residual accomplishes this task using a combination of blockchain technology,smart contracts, React(R) scripts, MS Excel(R) financial tools and easy-to-use UI functionality.
The process works as follows. The user is greeted by a simply designed homepage listing currently posted loan pools.
Specifically, our tool allows a user, the loan originator or Seller, to:
- Identify a pool to share
- The system calculates the total balance of the pool, weighted average coupon and weighted average remaining term, statistical quartiles for balance, coupon and term
- The pool information is placed in an IPFS location and reference to that pool is hashed on an Ethereum smart contract
- If contacted by a Buyer, the Seller has enough information to follow-up with the Buyer, begin negotiations, and ultimately use smart contract technology to transfer encryption to the Buyer (pending)
The Buyer is able to:
- Choose to evaluate the pool in part by reviewing the pools statistics
- Adjacent to the embedded pricing function, the Buyer can see a pool rating provided by prior bidders and a comment thread covering the participant universe's thoughts on the quality of the Seller (if known) and the pool itself
- Price the pool using a market rate consider the analytics and the percent to which the pool was attested (note: attestation feature involving third-party contracted auditors by Lender not complete at the time of this submission.)
- Rate and comment on the pool
- Make an offer to the Seller really as a way to communicate interest and begin negotiations
Not integrated into a UI for this event but contemplated here are tokenized Seller and Buyer information with rating and participation data. The smart contracts and transaction records via blockchain are available however. For this submission, the tool accepts a single loan tape format containing a fixed set of column fields; however, a simple mapping UI which was designed but not built would allow any time of debt to be uploaded. Actual transfer of supporting loan documentation, third party attest interface and data transfer services and funds transfer were also considered but not constructed.
In conclusion, the expansion of the secondary loan market to include greater numbers of lenders and buyers, and increased democratization of the market will ultimately benefit the consumer. Competitive price pressure will force buyers to incorporate greater risk pricing granularity, and greater efficiency will increase lender profitability. This profitability and competitive pricing will ultimately lower interest rates for consumers.
Built With
- blockchain
- ethereum
- excel-finance-tools
- javascript
- oasislabs
- react
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