Twelve years after the mining of the genesis block in the bitcoin network, cryptocurrencies have seen a historic rise in popularity with investors. The cryptocurrency market value has surpassed $1 Trillion for the first time as Bitcoin reached an-all-time-high of $39,000 per coin.
Associate Professor of Finance at the California State University Long Beach College of Business, Dr. Laura Gonzalez, has conducted extensive research in financial technology for the past 10 years. In her most recent publication, “Pro-Social Community Investments Online: The case for Hispanic Peer-to-Peer Lending,” Gonzalez’s research provides a glimpse of how technology can facilitate the lending industry. Particularly, benefiting both the lender and the borrower while also having the potential to diminish race and gender bias within the traditional banking system.
In a recent interview, Dr. Gonzalez said “When I came to CSULB I started to look at how fintech could help make services more effective. Not until very recently, if you wanted to borrow money you had to go to a bank or use your credit card. Now, you can apply for those loans online. You have institutional investors assessing small loan applications, but now there are also people doing it online. So, you have the opportunity to reach a wide audience that may not have the preconceived ideas of traditional bankers.”
Peer-to-peer (P2P) loan services first started in U.K. and U.S. in 2005, and the demand for its services increased exponentially during the 2008-2009 liquidity crisis. The P2P loan service matches borrowers directly with investors through a decentralized lending platform, eliminating the middleman and providing a personal transactions between two parties. A network that allows investors to see and select exactly which loans they want to fund, as well as generate revenue by charging fees to borrowers and taking a percentage of the interest rate earned on the loan.
With fintech providing a platform for P2P loan services, such as SALT, the blockchain technology uses crypto assets as collateral; basically, allowing (The Economist, 2015) “people who have no particular confidence in each other collaborate without having to go through a central authority.”
The concept of blockchain was first developed around cryptocurrencies. In essence, blockchain was a kind of filing cabinet technology used to trace the course of cryptocurrencies like Bitcoin. Think of it as a literal chain of blocks, the blocks carry digital information about transactions while a chain is a public database the information is stored on.
Imagine a public ledger, like a distributed excel spread sheet or data base where information is not just stored in one place, but there are copies of it. And when you add a decentralized factor onto that, it creates an avenue of possibilities in making financial transactions more exclusive—from the security of cryptography, to person-to-person participatory decision making, within a distributed storage of information.
With that being said, can blockchain technology end systematic racism within the banking system? Dr. Gonzalez’s research tackles this topic, in which prove that the decentralization of blockchain and the exclusivity of P2P networks can revolutionize the banking and lending industry. Lending discrimination occurs when lenders base credit decisions on factors other than the applicant’s creditworthiness. The practice of redlining made it nearly impossible for many members of minority groups to qualify for loans, and to buy or improve their homes, in which is persistent with the racial wealth gap in the United States today.
A 2020 research study, LendingTree— “Black Homebuyers More Likely to Take Out High-Cost Loans” written by Tendayi Kapfidze examined the racial disparities in today’s lending market. The study show that African Americans tend to receive higher mortgage rates than average mortgage borrowers; despite the record-low mortgage rates in today’s market:
- The mortgage purchase denial rate for Black homebuyers is higher than the denial rate for the overall population of homebuyers in each of the nation’s 50 largest metros. On average, Black homebuyers are denied mortgages 12.64% of the time. This is 6.49 percentage points higher than the overall denial rate of 6.15%.
- Milwaukee, St. Louis and Cleveland, are the metros with the largest spread between the denial rate for Black homebuyers and the overall denial rate for mortgage purchase loans, while Sacramento, Calif., Seattle, and San Diego are the metros with the smallest spread. The average spread in the metros with the widest gap in denial rates is 10.96%, compared to 3.45% in the three metros with the narrowest gap.
- As was the case for mortgage purchase loans, mortgage refinance loans are also denied at a higher rate for Black homeowners in each of the nation’s 50 largest metros. Black refinance borrowers are denied mortgage refinance loans, on average, 30.22% of the time. That’s 13.15 percentage points higher than the overall denial rate of 17.07%.
- Even in majority Black counties, the denial rate is disproportionately high for both Black homeowners and homebuyers. Black homebuyers in 83 of the 95 counties with majority black populations looked at in LendingTree’s study face a higher denial rate than the overall population in those areas. Denial rates for Black refinance borrowers are equal to or lower than those of the overall population in only 9 counties (LendingTree, 2020).
According to Dr. Gonzalez, “The problem is that [interest] rates are decided with algorithms that are biased. Then in terms of mortgages, it is the same thing. They have information that you provide in the mortgage application, but then they use all the information that is interpreted by algorithms, and the research shows that the usual groups are not getting a fair rate.” Gonzalez continued to advice that, “The solution is [not] waiting for regulations, [instead], what we need to do is start different ventures. Ventures that aim to serve this community, and so the other guys will just lose these costumers until they learn how to lend them properly.”
Dr. Gonzalez research predicts that, “By 2024, the global blockchain technology market is expected to be worth $20 billion, and the global P2P lending market is expected to be worth $1 trillion. Overall, blockchain represents the next chapter of growth for the P2P industry, although national regulations are expected to limit geographical diversification.”