Monday, November 23, 2015

Like Uber, but for usury

Some of the letters we received over the last few years. Several pre-approved credit card offers from American Express. A pre-approved loan of up to $25,000 from Harmoney. Two offers to upgrade to a platinum credit card from The National Bank (now ANZ). A letter informing us that our monthly credit card limit had been increased overnight by $27,000, if we would only phone to confirm. Then there was that time they sent me a replacement Air New Zealand airpoints card in the mail and it had magically mutated into a MasterCard platinum credit/debit card with PayWave technology, just waiting for my say-so to be activated.

The services that you didn’t even ask for and that come into your home: those are the creepiest tendrils of capitalism.

What most of these letters have in common is the promise of access to wealth, as opposed to debt servitude. In some cases – American Express, the National Bank’s platinum card – the offers have a whiff of old money about them: white-gloved waiting staff opening doors for you, perhaps on the way to a classical concert where you will mix it up with other high-class people. Nothing about our postcode or our finances would counsel these assumptions, but I’m sure the marketers know what they’re doing, and that pushing certain buttons works on folk like us.

The other approach is selling the aspiration without actually pretending that you do have access to the funds. Harmoney has the best line here. The offer of a pre-approved loan* they mailed to us in February of this year contained a list of helpful suggestions for things we might want to buy even though evidently we couldn’t afford them. It ran like this.

Only at the bottom did the company venture to suggest a more reasonable use for the loan, namely the consolidation of existing debt at a (possibly, hopefully) lower interest rate.

Elegantly, the asterisk in the Harmoney letter stands for – and I paraphrase – ‘this loan is not actually pre-approved’. Here’s the exact weasel wording.
This pre-approval is indicative for purposes of borrowing money through Harmoney. It is based on the information available to us at the time this letter was sent. The result when you register as a borrower to use the Harmoney service may be different to that which is provided here. In providing you with a pre-approval Harmoney does not represent that you will be successful in borrowing money through the Harmoney service.
But note the final sentence:
If successful and you apply in full, you could have money in your account within 2 working days.

We only have to walk down the road to the Newtown shops to find the brick and mortar equivalents of Harmoney’s ‘service’: companies like Aztec, Geneva and Instant Finance, where people who wouldn’t qualify for a credit card or a personal loan at a regular bank can go to get money quickly to get out of a jam. Hence the 2 working days promise: nobody needs a swimming pool or a campervan holiday quite that urgently. It’s when you have wolves at the door that you need the ready cash.

There were protests outside our local branch of Instant Finance some years back, targeting the role of rugby league star Stacey Jones in promoting the loans among the Pasifika community. But even these companies seem to have a certain reassuring presence – you can at least point to the buildings – compared to the online lenders, which a new law passed last year struggles to control.

Like online gambling, online instant finance is often presented as an exciting opportunity.

In one of my favourite images, from a US payday loan site, the money reaches into your home directly through the computer screen.

Breaking with the genre, Harmoney makes an appeal to family and offers two options: to borrow or to invest (that is to say, lend).

For Harmoney is a peer-to-peer lending platform, the first of its kind to have been licensed in New Zealand. Now peer-to-peer has to be the most spectacular misnomer in the history of language, given that by the very definition of the service the money goes from those who have it to those who don’t; not to mention the fact that the $100 million seeding money for the operation came from just four investors, who I strongly suspect will remain peerless. But TradeMe has a stake, and the press has been positive, and so we’ll have to regard the fact that they hawked their loans to us via the suggestion we borrow up to $25,000 to treat ourselves to a swimming pool as business as usual, that is to say, the free market doing what it does best. All we have to do is find a ‘peer’ willing to lend the money to us. Everything going well, it will be ours within two working days.

Spiralling levels of household debt – hidden inside fantastically opaque financial products – were among the causes of the Global Financial Crisis, so there is something especially lurid about the cheerfulness with which these products are promoted, so soon. But then the vision offered by the marketing brochures is not so much one of living beyond our means as independently of them: as if money will never matter again. A platinum credit card will ensure the hand that opens your door wears a white glove. A lavish holiday can be afforded now, paid for at a future time that is increasingly uncertain.

Soon there might be an app uncoupling us from the financial system altogether. Like Uber, but for usury, allowing us to lend and borrow freely, and become the loan shark of one another. There might as well be.


stephen said...

A couple of random thoughts.

1. In what sense is Harmoney different from a bank, really? They match depositors and lenders, but there are still external shareholders who need a profit.

2. Following on from that, credit unions, friendly societies and other not-for-profit/collective structures are more nearly "peer to peer", in that there are no external shareholders. In theory, they should be able to lend more cheaply, without the need to cream off extra profit for shareholders, and be more able to run a socially responsible lending policy. The continued low profile of credit unions in NZ is a sad thing.

Doug said...

stephen's point 2 is striking - community/collectives are actual peer-to-peer, without the vulture capitalists circling overhead..

Consumer Reports here in the USA says,
Credit unions
Why? They offer all of the services of a bank (and federal deposit insurance) but tend to charge considerably less for checking accounts and loans. And they generally pay higher interest rates on savings.

Giovanni Tiso said...

"In what sense is Harmoney different from a bank, really? They match depositors and lenders, but there are still external shareholders who need a profit."

They match lenders and borrowers, you can't really deposit your money at Harmoney. But I don't know to what extent they differ. They are lower-tier lenders, on one hand, clearly a company geared towards instant finance (those 2 working days). And our bank has never approached us urging us to get a swimming pool on instant credit. Then again, the effect of raising our credit limit by $27k overnight is functionally the same.

I would be interested to know how Harmoney manages risk, and to what extent 'peer' lenders make decisions in that area. At the moment the company assigns a credit grade to each borrower, and the lenders choose candidates based on how much risk they are willing to take on. In time, it could conceivably resemble an auction system such as that run by the shareholder Trademe, where people with fewer collaterals borrow at a higher rate of interest.

But I'm not passing judgment on this - I agree it's not all that different to what banks do.

On your point about credit unions, Harmoney exploits the cuddly imagery but does not appear to be run on the principles of social responsibility you describe.

Giovanni Tiso said...

Ah, there you go: a commenter on Twitter has supplied the details of Squirrel Money, another peer to peer lender offering "a personal bidding system" based on the prevailing market rates. There's a great picture at the bottom of the home page ( to show how this works. Nimish needs an engagement ring; Emily will lend at 12%. Michelle is expecting a baby; Joanne will lend at 9%. Aroha needs a new kitchen; Anson will lend at 9.5%.

Harry said...

In response to your question about how harmoney works, I was interested and signed up for an investor account with the minimum deposit ($500). It works slightly differently to the squirrel money system.

On Harmoney, they determine the risk associated with a loan, I presume by asking a whole bunch of questions and then putting it into an algorithm. Then the more risky people have to borrow at higher interest rates (justification: to compensate for risk of default). They rate the risk from A to F or something, with A borrowing at about 10% and F borrowing at over 30%.

As an investor, you can click on an anonymised listing for someone wanting a loan, and it brings up details about the person. E.g. whether they own their home, how long they've been in their job, whether they've got a loan from harmoney before. They can also put in a little message about why they want the loan. I've seen people put in that they wanted to do debt consolidation, or borrow to study, or travel overseas.

Hope that gives you a picture of what it's like. I do feel uncomfortable about the fact that almost by definition the people who can least afford the loans get the highest interest rates....

phil.aznz said...

The principal (see what I did there?) difference between P2P lenders and banks is that the P2P folks are lending out money that they have in the first instance. Same story with loan sharks, and with family members or neighbours...can't lend what you don't already have on hand. Banks, on the other hand, have the inimitable superpower of privilege to create money out of nothing. When a commercial bank makes a loan, it creates two entries in its electronic ledger: a credit in the borrower's deposit account (a liability to the institution), and a debit in a new loan account (the asset, from the bank's perspective). The borrower now has money to spend in the marketplace, but presumably has also given the bank some form of security over one or more tangible assets. [NB: Don't take my word on this. Read what the Bank of England has to say...banksplaining at ]

In its ability to create money this way, banks are effectively handed the reins of monetary policy in a crude and cackhanded manner. For their trouble, the interest paid over the life of the financial asset otherwise known as "the loan" is profit. But when the principal is fully repaid, the asset is gone and that amount of money has now vanished from the has been extinguished. So, for the marketplace (we also call it "the economy") to keep functioning, there need to be more loans, since that's how 98% of our money supply comes into existence. And if we want the economy to grow, that requires the money supply to grow...and because part of the money out there is going to pay interest, the growth of debts has to accelerate at a higher rate than the economic growth. This leads to an exponential curve, and if you remember back to introductory biology you may recall the example of yeast in a Petri dish.

All major economic collapses can be traced to a growth in credit which reached unsustainable levels [More link-clicky goodness: ]. We're in the middle of the next big one now, playing out on a global scale. There are better ways to do finance at a community level, and they don't involve interest. Small groups of individuals in NZ are helping one another as we speak, and not via these feel-good P2P platforms which put a smiling soft-focus veneer over FMA-regulated usury.