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Thursday
Apr092009

Business Week doubts the future of p2p lending

This week's article in Business Week, "Peer-to-Peer Lending Pain" chronicles the initial setbacks suffered by the social lending industry. Too bad that the author only focused on the past problems and didn't discuss at all the emerging improved platforms.

True, Prosper did suffer from a real adverse selection problem when it first opened and did not do nearly enough to screen out bad borrowers. Other social lending sites clearly learned this lesson and have adapted their model.

The author does point out the initial weakness of the p2p model:

Much of the early attention was on the sites' social networking aspects. Borrowers seeking loans of up to $25,000 could post profiles of themselves and their financial situations. Lenders, meanwhile, were ordinary people seeking better returns than those offered by other investments and supposedly could be swayed by personal appeals.

Being "swayed by personal appeals" is never a good investment strategy, whether it's from a family member or a complete stranger on the social lending site. I have little sympathy for Greg Bequette, the focal point of the story, who is expecting a 22% loss on his Prosper investment. Spending $800,000 on a brand new site and only diversifying the portfolio through 173 borrowers seems like a common sense bad investment choice.

At least the article gets one thing right:

If peer-to-peer lending does make a comeback, it's likely to serve only those with sterling credit who are shopping for better rates—and not the majority of entrepreneurs.

This is a natural evolution for the social lending model. Both Lending Club and Pertuity Direct, the two SEC-registered platforms, have implemented stringent borrowing requirements.

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Reader Comments (4)

I completely agree that the article focused too much on past problems in the P2P lending space, as opposed to discussing how the industry has evolved. What's interesting, is that just a few days later, another BusinessWeek reporter wrote a story titled "Peer-to-Peer Lending: Problems and Promise," focusing more on the social lenders currently in operation.

The reporter provided insight into the SEC crackdown and discussed how companies such as Pertuity Direct (a client) and Lending Club have implemented business models that fosters the flow of credit to worthy borrowers and adapted to meet industry needs.

You can check out the article here:
http://www.businessweek.com/investor/content/apr2009/pi2009043_811816.htm?chan=investing_investing%20index%20page_top%20stories

April 10, 2009 | Unregistered CommenterGinger Lennon

The bankers mantra of knowing your customer is lost in Prospers and Lending Clubs business model. ZimpleMoney.com facilitates loans between people who know each other and or have a compelling business relationship. ZimpleMoney offers a glimpse of a sustaining successful P2P business model.

April 10, 2009 | Unregistered Commentersteve rabago

@Ginger. Thanks for linking to the other BW article. It definitely offered a more positive assessment of the industry. I thought this was an interesting line: "There's not much difference, however, between a lending community like Pertuity that makes all the loan underwriting decisions, and a traditional bank, argues Bruene at Netbanker.com. "They've just replaced the FDIC-regulated intermediary with an SEC-regulated intermediary."" This reflects the point of view of some of our commenters.

April 11, 2009 | Registered CommenterMelody

@Steve. Thanks for bringing attention to ZimpleMoney. The model seems to be similar to that of Virgin Money USA. We wrote earlier about the wisdom of using a p2p platform to formalize loans between people who know each other. Glad to see that there is an additional option.

April 11, 2009 | Registered CommenterMelody
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