It’s an open secret that the traditional finance (Trad-Fi) market has become a breeding ground for predatory practices designed to exploit vulnerable borrowers. High-interest payday loans, hidden fees, aggressive collection tactics, and loan flipping are just a few examples of these unethical practices — with some lenders charging annual percentage rates (APRs) as high as 400%, trapping borrowers in an endless cycle of debt.
Additionally, charges such as origination fees and prepayment penalties can significantly inflate the cost of a loan, encouraging borrowers to repeatedly refinance their overdrafts and accumulate more fees each time they do so (a process known as ‘loan flipping’). The financial toll of these predatory practices is staggering.
In a report, the National Consumer Law Center estimated that predatory installment loans cost Americans over $12 billion annually in fees and interest. These loans, often marketed as a safer alternative, still carry excessive fees and are designed to keep borrowers in a cycle of debt. Similarly, a 2017 study by the Consumer Financial Protection Bureau (CFPB) found that over 80% of payday loans are rolled over or followed by another loan within 14 days, highlighting the difficulty consumers face in repaying these loans without incurring additional debt.
These statistics paint a grim picture of an industry that thrives on financial desperation, underscoring the growing financial burden on consumers in states with lax lending regulations. Predatory lenders often target low-income communities, minorities, and the elderly, leading them to experience immense levels of psychological distress, family tensions, and even bankruptcy.
Cleaning the Swamp
With the advent of blockchain technology, there now exist a plethora of transparent and immutable tools designed to streamline the lending market’s existing processes. For instance, smart contracts can automate loan terms, ensuring they’re executed exactly as agreed upon, without hidden clauses. This transparency makes it harder for lenders to hide unscrupulous terms or engage in deceptive practices.
Moreover, blockchain’s decentralized nature democratizes access to financial services, allowing for peer-to-peer (P2P) lending and much more. In fact, decentralized finance (DeFi) platforms are already offering users loans at much more competitive rates while also allowing them to connect with a wider pool of lenders, fostering competition that drives down costs.
One platform at the helm of this Web3-led revolution is Zivoe. As a credit protocol built on the Ethereum blockchain, Zivoe is designed to disrupt the high-interest consumer lending market. Its unique approach involves connecting on-chain liquidity with real-world borrowers, effectively bridging the gap permeating Trad-Fi and DeFi.
Zivoe’s model is ingeniously simple yet powerful. It issues on-chain loans to consumer lending companies, enabling them to offer fiat loans to consumers at significantly lower interest rates. This B2B2C model allows Zivoe to leverage blockchain’s advantages while working within existing financial frameworks. By providing cheaper capital to these companies, Zivoe empowers them to extend more affordable credit products to consumers, directly challenging predatory lenders.
Risk management is a critical aspect of any lending operation, and here, too, Zivoe shines. Loans issued by the platform are secured in a special purpose vehicle (SPV), which the protocol has rights to if the originating lender fails to perform. This structure substantially reduces the protocol’s credit risk.
Moreover, it provides a tangible recourse in cases of ‘defaults,’ wherein Zivoe can take control of the SPV and wind down the portfolio of consumer loans within it. Lastly, any funds not currently lent out can be allocated into DeFi protocols, generating an additional revenue stream. This ensures capital isn’t sitting idle, contributing to the protocol’s overall health and long-term sustainability.
The Need for a Symbiotic Ecosystem!
Many people nowadays seem to harbor the misconception that Web3 platforms are looking to replace traditional economic systems. However, the reality is far more nuanced, with platforms like Zivoe not necessarily competing with traditional structures but rather helping them become more transparent and accountable.
As highlighted earlier, blockchain technology offers an unparalleled level of transparency. Every transaction, every contract term, and every change in ownership is permanently recorded on a public ledger. This level of openness is in stark contrast to the often opaque practices permeating the Trad-Fi arena. By integrating blockchain into their operations, traditional lenders can demonstrate their commitment to fairness and transparency, rebuilding trust with consumers.
