Joos is a blockchain-based platform that aims to upend the global financial system by offering peer-to-peer loans and enhanced mechanisms for debt collection. The lending mechanisms offered by this platform offer clear monetary incentives for the community of lenders operating on Joos, such as creating an easily accessible marketplace to buy and sell secondary debt and decreasing the likelihood that debtors will become delinquent.
Importantly, Joos also promises widespread socioeconomic benefits as a result of shifting the global landscape of financial lending. For example, the platform aims to generate a single, objective credit rating system to replace the existing, arguably broken and biased, personal credit score system. It also offers an alternative to predatory payday lending by expanding the loan market and creating market opportunities for niche lenders.
However, there are also critical challenges that Joos faces in achieving its goals. Chief among these is the difficulty the platform faces in ensuring the veracity of its users’ information, which is essential for Joos’ novel debt collection measures to work effectively. In addition, it is important that the platform take regulatory action to prevent the very predatory lending it may undercut from spreading on Joos.
Socioeconomic Benefits of Joos
The first goal of this article is to more closely examine the potential positive social and economic changes that Joos’ peer-to-peer financial lending model can offer. We will focus on three areas in which Joos can make a significant global impact: offering democratic lending, reducing predatory lending practices, and establishing a non-discriminatory and transparent credit rating system.
Democratic Lending
One of the major failings of the current financial lending system around the globe is that it primarily works for people who are already relatively affluent. In contrast, there are numerous well-documented cases of minority-owned businesses and minority individuals being denied loans by the traditional banking system or being forced to pay exaggerated interest rates1,2. Similarly, much of the populations of developing countries lack access to low-cost loans from trustworthy institutions3. Although microfinance has developed in response to the need for accessible lending among these underserved populations, that industry has increasingly come under criticism for profit-chasing and charging high interest rates4.
By offering democratic, secure, peer-to-peer lending, Joos offers a solution to the historical imbalance in lending to these populations. Anyone with access to the Internet can connect to lenders on Joos, meaning that there is no inherent discrimination against the underbanked or against those in developing countries where major financial institutions do not have physical branches.
Moreover, the same financial incentives that draw lenders to Joos’ platform are likely to create competition on the platform. That in turn will drive down interest rates and offer opportunities for niche lenders to succeed by making specialized loans to narrowly defined populations. For example, several competing lenders may specialize in offering loans to specific rural populations within one country or region, or to minority entrepreneurs who have faced discrimination within the traditional lending system.
This lending, in turn, can have significant impacts on minority communities and developing countries. Loans could represent a mortgage to buy a home, which is traditionally a barrier to the accumulation of family wealth among minority populations5. Alternatively, loans made on Joos could be used to support small-scale entrepreneurship in developing nations. Across a wide scale, Joos-based small loans in developing countries could play an important role in spurring economic progress.
Reducing Predatory Lending
Another major potential socioeconomic effect of Joos’ introduction is the reduction or even the elimination of predatory lending. This type of lending, which is epitomized by the payday loan industry, operates by charging the consumers most at-risk of defaulting on loans exorbitant interest rates and expensive hidden fees6. Historically, individuals have been driven to these predatory lenders largely because banks and other trustworthy lending institutions have decided against the practice of making small personal loans.
By enabling lenders to make small, short-term loans to individuals on the platform, Joos offers a clear way to undercut the predatory lending industry. Joos lenders have a wider potential audience and can charge interest rates well below those offered by predatory lenders because there are few business costs to operating on Joos. Furthermore, because Joos encourages competition among lenders – and especially small personal lenders, where the capital barriers to offering loans are negligible – there is extra incentive for lenders to reduce their interest rates and remove hidden fees.
In addition, the debt enforcement mechanisms built into Joos, the creation of a secondary debt market on the platform, and the platform’s immutable blockchain-based credit rating system all work to significantly reduce the risk to lenders who make small personal loans. First, small personal lenders have more tools at their disposal in Joos to collect on delinquent debts than in the traditional lending market. Second, if a lender decides that collecting on delinquent debt is not worth their effort, they can recoup a portion of their losses by selling the debt. Finally, lenders can easily track the financial lending history of Joos debtors when making decisions about to whom to make loans and at what rates. All of these factors combine to reduce financial risk for lenders, which in turn should lower interest rates well below those found in the current, often predatory, short-term and small loan marketplace.
Credit Rating System
Another important shift that Joos will make in the financial lending industry is a rethinking of credit scores. Currently, consumer credit scores and business credit ratings are determined according to a system that is at best unfair, and at worst arbitrary. Consumer credit scores are largely based on home ownership, which tends to disadvantage minority populations, while business credit scores have been widely demonstrated to harm minority-owned businesses7. Furthermore, credit scores have been shown to be used as a tool for racial and socioeconomic discrimination throughout the financial lending system8. Worst of all, consumers are unable to see the factors that affect their credit score and are penalized for checking it.
Joos aims to create an immutable credit rating system based entirely on individuals’ transaction history on the platform. This inherently eliminates considerations of race, socioeconomic, or educational status in determining credit scores, which will lead to fairer lending for everyone on the platform. In addition, credit ratings are stored on the blockchain, so that all factors leading to a change in credit rating are fully transparent to Joos users.
Challenges to Joos
With those potential socioeconomic benefits in mind, we will now investigate some of the obstacles that Joos is likely to face as the platform grows. In particular, we will focus on how the platform will need to ensure that users provide true personal information and how Joos may need to adopt regulations to prevent predatory lending on the platform.
Personal Information and Unique Accounts
One of the major challenges to Joos, as well as for any online marketplace, is ensuring that users provide accurate personal information and do not create multiple accounts to circumvent punitive measures. The former is particularly important for Joos, as the platform’s unique debt collection mechanism relies on creditors having access to the personal information of those to whom they make loans. In that case that debtors provide false information, the debt enforcement mechanism is effectively toothless and loans untraceable outside the platform.
While it is possible to verify personal information, such as by requiring government ID to register on Joos, such a mechanism would inherently violate the government-free ethos of the platform. Just as important, collecting identification and checking it is highly likely to create numerous data security issues. Thus, Joos may face difficulties in finding a universal method for ensuring that the personal information provided by users to securitize loans is accurate, without needing to share that information, store personal data in a centralized location, or rely on government-backed means of verification.
A closely related issue is that Joos must have protections in place to ensure that users cannot circumvent the platform’s universal and immutable credit rating system by creating multiple accounts. If this were to happen, there is little repercussion to a user defaulting on multiple loans across multiple Joos accounts. Assuming that Joos is able to verify identification, this problem could be solved simply by regulating that no single ID can be used to create more than one account. However, it is important that Joos remain vigilant of fraudulent IDs and allowing multiple forms of ID to be used for account creation.
Predatory Lending
While Joos has great potential to reduce or even eliminate predatory lending, without self-regulation on the platform it is also possible that Joos could proliferate predatory lending. In this case, lenders on Joos could simply ignore the risk mitigation and lower costs of entry that come with operating on Joos and choose to charge predatory interest rates. However, these high interest rates should be reduced or eliminated as the number of lenders operating on Joos grows and competition among lenders increases.
Still, Joos may need some level of self-regulation to prevent against hidden fees or masked interest rates. For example, without any regulation, lenders may be able to offer loan contracts that include a very low and widely advertised starting interest rate, which then balloons after a certain period of time. This type of lending may be more difficult for debtors on the platform to identify accurately, but is still extraordinarily predatory and cannot be eradicated by competition alone.
Conclusion
The unique peer-to-peer lending and risk mitigation model of Joos offers to bring competition and specialized lending to populations worldwide. That, in turn, offers the potential to leave behind the racial and socioeconomic discrimination that characterizes the existing financial lending industry, and to provide opportunities for widespread economic development. However, the path to achieving these benefits does require overcoming several hurdles, such as ensuring fair use of Joos’ platform and installing mild regulations to prevent abuses by lenders.
References
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2Goering J, Wienk R (eds.). 1997. Mortgage Lending, Racial Discrimination, and Federal Policy. Routledge Revivals.
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4Mersland R, Øystein Strøm R. 2013. Microfinance: Costs, Lending Rates, and Profitability. The Encyclopedia of Financial Globalization. Elsevier, Oxford, UK.
5Lee H, McCollum M. 2018. Differential Impacts of Mortgage Curtailment in Household Wealth Accumulation. Financial Management Association Conference.
6Sweet E, Kuzawa CW, McDade TW. 2018. Short-term lending: Payday loans as risk factors for anxiety, inflammation and poor health. SSM Population Health 5:114-121.
7Henderson L, Herring C, Horton HD, Thomas M. 2015. Credit Where Credit is Due?: Race, Gender, and Discrimination in the Credit Scores of Business Startups. The Review of Black Political Economy 42(4):459-479.
8Korver-Glenn E. 2018. Compounding Inequalities: How Racial Stereotypes and Discrimination Accumulate across the Stages of Housing Exchange. American Sociological Review 83(4):627-656.