Entries in p2p lending (44)

Saturday
Jul172010

"Zynga for real men": a troubling blend of FX trading and social gaming

Online platform eToro is opening up the complex world of foreign exchange trading to the masses through a simple and social user interface - but is this democratization of currency speculation good for the market?

Much like online prediction markets, eToro makes trading easy and fun, with leaderboards, discussion threads, and neat visualizations, but the truth is that the FX market is not fun and games. Participants are not betting with fake cash on who will win the World Cup in the pursuit of prizes, but rather are speculating on the currencies of real countries. The FX market serves a very important purpose: to facilitate transactions worldwide in all currencies. A collapse in currency can have very a real impact on individuals who never have even heard of the FX market and certainly never chose to gamble their future on it (ask the people of Malaysia or Thailand in 1997).

Admittedly, the concept behind eToro is brilliant: providing access to the largest financial market in the world that has largely been the domain of large financial institutions.  Even better, the market is entirely over-the-counter with no regulation or central oversight. So you can short at will, there is no up-tick rule, it operates 24 hours a day during the week, and the concept of insider trading doesn't exist. But herein lies the danger. Already, most trades are purely speculative (a full 80% where no currency ever actually changes hands) and while this influx of cash daily gives the market tremendous liquidity which is good for trade, it also puts the fate of countries' economic well-being in the hands of bankers. Adding in novice traders allured by what investor Howard Lindzon described as "Zynga for real men" would seem to make the market more volatile, not stable.

Of course, eToro's influence on the market is negligible. While $100 billion already traded on the platform is some nice volume, FX trading accounts for nearly $4 trillion daily. So novice traders can have fun and muse publicly on the geopolitical factors that will cause X country's currency to depreciate, raising their individual stature on an eToro leaderboard and maybe getting new followers to mimic their trading habits. Michael Arrington describes this all as very fun and as it goes more social, increasingly "funner".

Yet let's remember that foreign exchange trading has a real impact on lives and is not just a game. Of course, there is no reason to think that institutional investors take this into consideration, but as an individual, I can choose differently. That is why I invest in Lending Club, a platform that is also fun, but also transparent about risks, returns, and the impact on the people participating (and without the potentially devastating externalities to people outside of the market altogether).

Addendum: Hacker News has a great comment thread on this post.

Sunday
Jul112010

A call for peer to peer lending in Afghanistan

“The citrus are like children, they are very fragile, very thin and they need lots of attention and effort. But the olive tree is a tough thing, it survives by its own strength.”

Photo by Moises Saman for the New York TimesI was moved today by the NYT article on severed olive and orange trees in groves across Afghanistan and the commitment of the local farmers to re-grow them. The article paints a picture of the grove's successes and trials that reflect a broader Afghan picture - massive (and competing) investments by the Americans and the Soviets in the 1980s, followed by devastation during the Taliban years, and now, the seeds of rebirth funded by American military support.

Rebuilding the groves is a worthy undertaking - with the potential to employ tens of thousands of young Afghans, this is the type of investment that will reap benefits for years to come. But the approach seems too strangely reminiscent of that of the 1980s: an initial $1.8 million gift from the U.S. military Provincial Reconstruction Team (PRT) and the expectation of years of additional governrment money to come. Indeed,

Mr. Hakim estimates that he will need foreign support for at least five more years to get the farms on track to be fully productive again. The Agriculture Ministry has begun sending modest amounts of money, but is expected to increase the budget as millions of dollars in foreign donor funds become available.

The U.S. money to kick-start the project is understandable, but in a country where corruption is rampant, is funneling future funds through the Agriculture Ministry the way to reach Gul Abbas and farmers like him for this endeavor? When the initial projects were top-down designed by the Americans in the 1980s, there were no local champions with the expertise to guide them.  But now, there is Mr. Abbas, who possesses both the knowledge and the passion - can he be reached directly?

Click to read more ...

Wednesday
Mar312010

I'm robbing the bank, you should too: earning 13.59% through peer-to-peer lending

These days, it's easy to hate the banks. The government has managed them with bailouts and now special taxes, policies that you and I may agree or disagree with but likely have no impact upon. But there is a micro, market-based way to fight the problem: steal their business.

Traditional banks charge exorbitant rates for personal loans, as high as 29%. In the peer-to-peer marketplace, I can undercut the banks by funding loans at far more reasonable rates and still make a nice profit. My current expected returns? 13.59%. After kicking off my $1,000 p2p lending portfolio on Lending Club in early December, I've slowly built up my portfolio over the past few months, periodically adding $500 every couple of weeks until this week when I felt comfortable enough with the platform to drop in the final $2k. My portfolio at a glance:

Through these first few months, there are a few things I've learned....

Click to read more ...

Tuesday
Feb092010

An Interview with People Capital: P2P Lending for Education Finance

The limitations of the current credit risk modeling approach – the FICO score – are manifold, but nowhere are they more glaring than the complete inability of FICO to evaluate young people. A system based entirely on prior payment history discriminates against youth who are just entering the financial world. For students seeking to continue their education, and needing loans to get there, the consequences are severe – automatically labeling as a credit risk may shut them out of the private loan market and prevent them from attaining higher degrees, regardless of their potential.

Around this striking weakness of the current education finance market is where People Capital, a p2p student loan platform, is seeking to innovate.

Click to read more ...

Tuesday
Jan262010

Doubling the p2p portfolio on Lending Club

Since I wrote recently (and critically) of the recent negative articles about p2p lending, I thought it was time to put my money where my mouth was, so tonight I doubled my Lending Club investment portfolio.

 

Of the initial $1,000 that I invested last month, $250 didn't clear (because loans either fund fully or not at all so if a borrower fails to attract enough investors, the lenders who initially pledged retain their money), so I began backfilling that portfolio. Then I used their investing tool to screen by a few filters - less than 3 defaults in the past 2 years, approved by Lending Club - and create a customized "moderate risk" portfolio. I scanned the 50 proposed notes and eliminated those that seemed particularly egregious. Like last time, "egregious" to me meant poor grammar, failure to answer investor questions, and bad business ideas, such as this gem:

I help executives with 15+ years of experience start their own businesses as solo Entrepreneurs, or "Solopreneurs". After streamlining the setup process and creating an "incubator" that has most of the systems already setup for them, I am now ready to deliver this service via the web using an interactive website. (Emphasis added)

I then filled in the gaps with handselected loans that met my most stringent criteria - verified income, no defaults in the last 2 years - plus an effort to get loans that will clear more quickly - notes that end in less than 7 days. My expected return, accounting for expected defaults, is just shy of 12%.

My standards are rather lower than I thought they would be. I suspect that if I actually knew these people, I wouldn't lend to the majority of them. Maybe I'm being elitist. The questions asked by the lenders also seemed particularly invasive, "e.g., what steps are you taking to ensure that you will not end up in this financial hole again?" I thought about signing up as a borrower as well to see the experience, but now realize that I would prefer not to be so examined by strangers myself.

Still, I'm really excited about my Lending Club investments. I've begun to receive my first deposits and I look forward to continuing to grow the portflio.

Thursday
Jan212010

Continued criticisms of p2p lending

A slew of articles criticizing the emerging p2p lending industry appeared this week, beginning with Mark Gimein's post at Slate's the Big Money, "You are Unlikely to Prosper". Felix Salmon soon after wrote "The Problem With Peer to Peer Lending" and then Techdirt followed with "Person to Person Lending Not Saving the Economy...Actually Looking Really, Really Bad".

The message of all of this coverage? That p2p lending is riskier than advertised, most lenders have lost money, adverse selection abounds, and really the whole venture is a failed innovation in finance. As usual in articles about p2p lending, the comments are full of testimonials from lenders about their terrible losses on Prosper.com and how p2p borrowers tend to be deadbeats.

If we were back in 2008, these criticisms would all be noteworthy. Prosper undeniably made terrible, risky gambles, produced misleading advertising, and failed to adequately screen borrowers in the early years. Investors are still reeling from those mistakes (see Fred93 who dropped $800K into the site), but why are we still focusing on earliest years and the losses incurred during the height of the credit crunch? This seemed like old news back in April.

By contrast, Lending Club (scarcely mentioned in these articles) launched with SEC approval, institutes stringent borrower requirements, and has a happy lender community (no hate blogs that I've found yet). Gartner predicts that p2p lending will increase by 66% over the next three years. It's 2010. Let's look forward and let the new crop of p2p lending companies learn from Prosper's early mistakes and do better.

Note: The best discussion forum to get a sense of p2p lender frustration is prospers.org.

Flickr credit: amalthy

Monday
Dec142009

A potential new regulator for p2p lending companies

The new House financial reform bill has been described as a positive development for the p2p lending community and welcomed by industry leaders such as Prosper CEO Chris Larsen. The reason is the move of transfer of regulatory authority from the SEC to a new entity, the Consumer Financial Protection Agency (CFPA). Getting out of the clutches of the SEC probably is good news; so many nascent p2p marketplaces that initially seemed so promising, from Yadyap to People Capital  to Zopa, have either stalled or shuttered US operations in face of overwhelming regulatory requirements. Even those that survived – Prosper, Lending Club, and Pertuity Direct — were set back considerably at the time.

Yet, I’m concerned about a new entity receiving such broad sweeping power in the name of consumers and what it means for the p2p community. The Consumer Product Safety Commission, for example, has not looked with particularly friendly eyes upon the “innovation” of direct selling of handmade children’s items (rather than relying on mass production in China) and threatens to significantly curtail the operations of small sellers on Etsy. It is a sad day when the interest of big business overrides the best interests of the consumers in the name of protecting them.

Here’s to hoping that the CFPA, if it is in fact created (still a great uncertainty), will recognize the benefit of alternative credit models to consumers, rather than restricting access in fear of innovation and newness and of course, the lack of a massive lobbying effort to speak for the consumers who can now access loans at reasonable rates and the lenders who can make sound investments.

Monday
Dec072009

My $1,000 Lending Club p2p lending portfolio

Since the closing of Pertuity Direct, I made my first move back into the domestic p2p lending market this weekend, opening a Lending Club account with a friend. Our goal is to earn a healthy and stable return of around 10% with minimum monitoring required and full transparency of the status of our investments at all times.

My approach was first to use LendingMatch, their automated tool, to give me a decent, diversified base portfolio. [On a design note, the user interface of LendingMatch is extraordinary; it ranks up there with Etsy as among the most fun and intuitive browsing and selecting tools]

I selected three filters:

  1. $1,000 total investment
  2. Target return (after accounting for expected default and the service fee) of 11%
  3. No delinquencies in previous 2 years

There were certain other filters that I wanted to choose—notes that were both approved by the Lending Club credit team and where the individuals had their income verified—but they too restricted the portfolio, bringing me down to only a handful of notes, so I let them go.

This search gave me 32 notes to compare. I went through them individually to eliminate certain notes that failed in certain less scientific ways:

  1. Inability to spell (especially in the case of the two word loan title, e.g. “Debt Consoalidaton”)
  2. Bad business ideas (e.g., fixing up and flipping houses in a depressed housing market)
  3. Failure to adequately answer questions asked by other lenders

At this point, my portfolio was a bit more aggressive than expected. Lending Club rates their notes from A (less risky) to G (more risky) and I had no A or B loans and an excessive number of F and G loans. I filled in with more A and B loans, filtering for verified income, which obviously brought my expected return down a bit, but I was more comfortable with the final result, summarized here:

 

The historical default for this blend is about 3.5%, plus the fee of about 0.7%, so my final expected rate of return is between 10 and 11%. My plan is to continue to expand this portfolio to $5,000. I was actually prepared to invest all that at once, but there are simply not enough notes on the site to create my desired portfolio at that scale. Rob at Lending Club indicated to me last month that the company is focusing on attracting additional borrowers. Now I fully understand why a sufficient number of borrowers is so crucial to taking p2p lending mainstream; while it remains hard to invest a significant amount of money, Lending Club’s reach is limited.

The company’s customer service remains stellar. When I experienced a technical issue, I Twitter DMed @RobGarciaSJ, their Senior Product Strategist, who wrote back nearly immediately.  A colleague who is also looking at opening an account shared with me several e-mail exchanges he had with one of their VPs, all answered in great detail within a few hours. Through those emails I learned that Lending Club is allowing accounts to be opened on behalf of dependents. My colleague is looking for a way for his kids’ savings accounts to earn more than 0.5% interest and thinks Lending Club may be a good option.

I’m looking forward to expanding my Lending Club portfolio as the company grows and tracking how it is going here. With expectations of a 10% return, warnings of “if it sounds too good to be true, it is” ring in my ears, but I remain optimistic that p2p lending is simply offering a simpler, better investment opportunity. It’s one I’m willing to bet on.

Wednesday
Nov252009

Democratizing finance with p2p lending and microfinance

A savvy, young real estate investor of mine asked me recently about p2p lending:

"What is this peer-to-peer lending about? Is it true that anyone can lend to strangers on a website without anyone who actually knows anything about investing helping them? They must be getting screwed. Investing is hard. Not everyone should be doing it themselves.”

It's a similar argument to that made by many critics of microfinance recently: that the poor aren't knowledgeable enough to make use of access to financial services wisely. As with naive p2p lenders who far from earning a return, may end up holding useless paper of defaulted loans, naive microfinance borrowers  may end up far from improving their lives in the worse shape of over-indebtedness.

These concerns certainly are valid. Not everyone is a savvy lender with knowledge of investing principles and not everyone is a born entrepreneur or businessmen who can reasonably project future income based on new debt. But there are some common principles that both p2p lending companies and microfinance institutions can (and often do) embrace to alleviate these concerns and make them both accessible and fair.

  • Simplicity. P2P lending is remarkably straightforward: You (the lender) select the return you want and the risk you can accept, choose borrowers that fit that profile, and agree to lend them money. You then collect a proportion of their monthly interest. This is a process that most people can understand without credentials as a finance genius and creator of synthetic CDOs. And because more people can understand it, more people can reasonably be expected to enter the market and make rational decisions. I’m a believer in not investing what you don’t understand, but a smart person can get p2p lending.
  • Transparency. As a P2P lender, your money changes passes from you through one middleman (the lending institution) to the borrower. There are no mysterious detours. You won't be told that your loans will be repackaged into something newer and better that you no longer recognize. To the unsavvy investor, this is paramount -- I can track where my money is at all times. In microfinance, the transparency comes with clear terms and rates. Adjustable rates and balloon payments don’t exist in the legitimate microfinance world. First time borrowers can enter into these agreements with full knowledge of what their repayment commitment will be throughout the course of their loan.
  • Quality. When markets are open and quality is poor, disaster awaits. Unsophisticated, early investors on Prosper lended money to very high risk borrowers and were soon burned. P2P lending companies learned quickly from this mess that they needed to focus on finding quality borrowers. In fact, Lending Club now claims that among their biggest challenges is finding enough good borrowers, not lenders. Similarly, many microfinance institutions have embraced a certification/rating mechanism to signal high quality partner institutions that embrace client protection. This is a market mechanism to determine quality (like Moody's, minus the conflict of interest) of the providers and minimize negative effects on the poor borrowers.

I agree that there are risks to democratizing finance. Cutting out expert financial advisors to investors and providing access to capital to poor borrowers can lead to dangerous outcomes if the opening comes without caution. My friend worries about what will happen to amateurs making investment decisions without the help of an expert. The Wall Street Journal and others worry about what will happen to the poor who become overindebted because of newfound access to financial markets. I argue that people can generally make good decisions for themselves if the right prerequisites and protections are in place. P2P lending companies and microfinance institutions offer that chance.

Wednesday
Oct212009

For transparency...in government and p2p micro-lending at Kiva

 

Lawrence Lessig's article "Against Transparency" in The New Republic has sparked a lot of debate about the perils of going down the road of "naked transparency".  Lessig fears open data for government may end in citizen cynicism and withdrawal from the political process. Rather than being actually against transparency, he makes clear in his follow-on article and this interview that his real concern is that people will see transparency as the sole answer rather than the necessary combination of transparency + meaningful campaign finance reform.

I agree that transparency is not a panacea, but I believe he overstates the "perils" of open data. Take a look at the Sunlight Foundation's display of health care lobbyist contributions to Senator Max Baucus, author of the current main health care reform bill being debated in Congress. Will citizens reach "unwarranted conclusions" upon seeing the nearly half a million dollars Senator Baucus received from these lobbyists while he was shaping health care reform? It's a scandal that such a revelation does not lead his career to "be destroyed".

Of course, Prof. Lessig is in support of such thoughtful analyses and he is right to bring up the broader reform issues.  I believe we need more of the kind of transparency and analysis that the Sunlight Foundation has fostered, but the cynicism question raises an important point. One can imagine a scenario in which people are participating in a process that is ultimately good while ignorant of some of its messier internal mechanics. Should that process be made transparent at the risk of alienating the participants or is ignorance really bliss?

Take the case of Kiva. Yesterday the Harvard Businesss Review pointed out that the peer-to-peer lending platform tells a story that is not entirely true. A large part of Kiva's appeal for lenders is the implicit promise that your money goes directly to the needy entrepreneur of your choosing. In reality, the $25 that you donate on Kiva to Ndidi Bienose, for example, is routed through his sponsoring NGO, Lift Above Poverty Organization (LAPO). LAPO collects all lender money and in turn distributes it to their entrepreneurs. This is one reason for the unexpectedly high repayment rates of Kiva (~98%) -- individual losses can be easily disguised within a group under an NGO. Microplace uses the same model, but has always been straightforward about it.  Kiva, however, has been vastly more successful because of their more appealing, albeit untrue, story.

This unplanned transparency could turn into an example of what Lessig fears: that the exposing of the behind the scenes action will turn previously happy do-good Kiva lenders into cynics who now see P2P micro-lending as just as corrupt/misleading as the more traditional forms of aid that it hoped to supplant. Due to the attention problem that Lessig identifies, lenders will not take the time to learn that the end result of Kiva's and Microplace's approach is actually more effective and more efficient than direct peer-to-peer lending.

It's too soon to tell whether some Kiva lenders will be turned off enough by the revelation to stop participating, but I'm optimistic that the real Kiva story can be told effectively.  There is a powerful fact that Kiva can stand behind : Lending through a field partner is more reliable than direct lending and smooths the process for the benefit of the entrepreneur that the lender is hoping to help. The bottom line of Kiva remains the same -- to alleviate poverty through microloans -- and in the end, your money still goes to Ndidi Bienose. In Seth Godin's parlance, the P2P story is still authentic, even if it is not entirely true.

So is the new transparency in Kiva a good thing? A few lenders may be lost, yes, but the ones who remain will have full knowledge of the process and will no longer be duped. The strongest and most engaged communities are built on honesty. The same is true of government.

Flickr credit: bgblogging via Creative Commons, where I get all my photos and a concept for which I thank Lawrence Lessig for pioneeering

Monday
Oct122009

An Interview with Lending Club: The future of P2P lending and what can be learned from microfinance

Lending Club, and the P2P lending movement more broadly, reached a major milestone this past week as the company attained its 25,000th investor.  In addition, they also issued more than $5mm in loans in September, presumably becoming the largest P2P Lending operation (based on monthly volume) worldwide.  After being the first peer lending facilitator to pursue and complete the path of SEC registration, thus insulating its investors and borrowers from regulatory upheaval, Lending Club is now boasting average return rates of 9.65%, after fees and defaults are taken into account, and an annualized default rate of only 3%. I had the pleasure of chatting recently with Rob Garcia, Senior Director of Product Strategy (on Twitter @RobGarciaSJ) about how Lending Club is doing and how they plan to take the concept mainstream as they approach their third year– including what they can learn from other P2P platforms like microfinance.

The connection between microfinance and P2P lending

With the obvious similarities in their core practices – P2P connection, community emphasis, cutting out traditional middlemen, simple and sound investments – I questioned what Lending Club felt that it had in common with microfinance platforms like Kiva.  At Transcapitalist, we have been criticized for drawing too close a connection between these sites, but Rob agrees that their essence is the same, “people lending to each other practically and directly to accomplish something that they wouldn’t otherwise be able to accomplish.” He notes, however, the major difference in their reach and application.

Unlike Kiva and other microfinance platforms, participating in Lending Club is only marginally driven by a sense of social good.  P2P lending in the United States is measured like most financial investments: by rate of return. The fabulous success and reach of Kiva, however, still offers some major lessons to the domestic P2P lending industry about how to make an innovative financial product appeal to a mainstream audience.

Rob also mentioned the differences between borrowers.  At Kiva, loan recipients are typically unbanked or underserved entrepreneurs around the world, whereas Lending Club’s borrowers are those with excellent credit in the US looking for a better rate, and an easy yet confidential loan process. 

Is P2P lending right for small business?

In contrast to the microfinance focus on entrepreneurs, most of Lending Club’s loans deal with current debt obligations, like paying off a credit card.  Some experts think that P2P lending will never take off for American small business owners since the barrier to entry is so high that most aspiring entrepreneurs who can pass through all of the other hurdles can also qualify for a bank loan. Small business loans are actually declining as a portion of total loans made through the site, from 20-25% at Lending Club’s launch 2.5 years ago, to 15-20% today.  Rob said this is most likely due to the current economic environment that makes entrepreneurship more difficult in general, but also to Lending Club’s adjustments to their credit policy since they opened.  

Lending Club, however, believes that there is a strong place for small business loans in the P2P lending framework and Rob suggests that the movement towards loans for credit card consolidation is largely a product of the current credit crunch. He offers two types of businessmen who could benefit from a small, relatively short-term loan: small business owners experiencing an upward cyclical phase and entrepreneurs with a new and innovative idea.

The former can probably get a loan from the bank, but with business lines of credit so expensive, a P2P loan may be a more cost-effective solution. The latter, Rob believes would probably actually struggle to get a traditional bank loan. The benefit for this type of borrower is that credit risk is evaluated according to personal ability to repay rather than more stringent small business loan requirements, meaning that borrower should be able to repay the loan regardless of the success of his product. For high credit individuals, it is thus easier to attain an unsecured, personal loan of up to $25,000 – the Lending Club product – than a bank business loan.  Rob offers Lending Club as an easier, cheaper and crowd sourced way to get an innovative idea off the ground, helping entrepreneurs avoid the typical trap of putting start-up costs on their personal credit cards.

Taking P2P lending mainstream

Given Lending Club’s success and growth, I inquired whether the company was considering applying the P2P lending concept to other products like micro-investing or crowdfunding, but Lending Club seems to first be committed to the success of their current product first, saving product expansion plans for when the right time comes. As P2P lending shows signs of going mainstream, Rob fears that adding any new product will just make it more confusing and is instead looking to first build a track record. The 9.65% return rate is helping to convince skeptics that the power of the platform is real and here to stay.

Lending Club is expecting the tipping point to be at their three year point, only a few months from now. They are already seeing  a rapid increase in deposits in the platform with average initial deposits growing from $100- $500 at launch to over $1,000 this past year, which Rob sees as evidence that “there has been a clear shift in trust.” Now that the story is sinking in on the investment side, the company is focusing on finding good borrowers, as they accept only a small fraction of those seeking loans. This commitment to quality has shown clear results: Lending Club’s initial screening plus the lending community’s judgment of the credit risk of individuals has so effectively evaluated risk that the site has only a 3% annualized default rate.

Rob identified Lending Club’s three current areas of focus that would help them increase P2P lending mainstream reach:  keeping their operations efficient, evolving the product to address people’s initial concerns  to adopt a new product, and making profile browsing and investing more efficient to allow the concept to better scale.

One limitation of a 25 person company with low operational expenses is that there is a very small marketing budget that simply can’t compare to traditional banking advertising. Lending Club has strong social media presence, which can only go so far.

The second hurdle is one of adoption. The normal cycle of any new product is to go through a phase of skepticism and Lending Club has seen this doubt manifest itself with accusations of being like a Madoff Ponzi scheme. Rob believes that phase is dying down now that the initial community that has tried it and succeeded.  I would counter that the big test remains the three year point, when the initial cadre of loans come full term.  With that said, many Lending Club investors are pleased with their loans’ performance thus far.

Finally, single profile browsing can be a laborious process. The only responsible way to lend on Lending Club is to diversify your investments, but with larger amounts of money, browsing and evaluating a sufficient number of investment options is no small task. Pertuity Direct attempted to confront this problem by eliminating profiles entirely, but this was probably a step too far at the time and created confusion about what exactly the term “social lending” meant. Lending Club is pursuing a less severe course. Rob disclosed that Lending Club is preparing to release a new investment UI to make it easier to invest large sums of money without needing to browse profiles individually, instead letting investors choose advanced credit and social filtering criteria to help assemble a diversified portfolio.  Rob recognizes that people are used to going to the bank and opening a CD without needing to look at it for 6 months, so while browsing is part of the core P2P lending concept, they need to find new ways to make it easier and give investors just enough control.

Moving forward, Lending Club is clearly betting on a growing place for P2P lending. Even as the credit crunch subsides, it is still unclear whether/when credit card rates will fall. Traditional banks will probably have a hard time cutting into their spread to offer  rates closer to the ones offered by Lending Club (as low as 7.89% APR) because in the end, credit cards are still an intermediary that needs a spread to account for a 10% default rate. By nearly eliminating that spread and operating leanly, P2P lending will continue to be a competitive product for both borrowers and investors.

Monday
Sep142009

P2P microfinance for education, entrepreneurship, or work?

Internet platforms are springing up to connect western lenders directly to developing world borrowers in the name of ending poverty, embracing different philosophies on how to achieve the same end. We've covered (here, here, here and here) Kiva and Microplace, who each embrace micro-entrepreneurship; Samasource who challenges you to "give work"; and Acumen Fund, who invests patient capital. The latest is Vittana Foundation, a non-profit startup specializing in education microfinance.

Vittana is seeking to bring change to the developing world by expanding access to student loans. On the site, you can lend to students though microfinance institutions (MFIs), helping them attend school and ostensibly opening up additional opportunities for social mobility:

Your student goes to school. He graduates and then gets a real, stable, salaried job. Congratulations! Your student has taken the first step towards a thriving, successful life. Real change has begun.

But I wonder whether an education necessarily means opportunity in many of these countries. Are the jobs there to provide gainful employment to new graduates? I embrace increased access to education as a step towards reducing poverty, but how does Vittana fit into the increasingly dense international p2p lending space?

Is it targeting a different population than the micro-entrepreneurs on Kiva? Kiva co-founder Jessica Jackley is on Vittana's advisory committee, so clearly she sees it as providing an important additional service. Could it be a complement to the job training and work focus of Samasource?

Monday
Sep072009

Pertuity Direct closes, dealing a loss of diversity to the social lending space

Over the past two weeks, the Twitter-scape has seen a minor flurry of speculation regarding Pertuity Direct, a more recent entrant to the social lending space. As a PD lender, I was mildly worried about the status of my deposits and confused by the lack of formal notice on the platform's website. This past week, I had my full deposit (plus ~2% interest) returned unceremoniously to my bank account, confirming my suspicions that the site is closing its doors.

This is an unfortunate development for the social lending industry. I interviewed the PD CEO back in April and was impressed with the caliber of the team and also the different approach that the company was taking, as they sought to make social lending a more mainstream concept. Unlike the major players at the time, Prosper and Lending Club, PD eschewed the typical borrower profile pages, instead embracing the concept of a pool of anonymous super-prime borrower loans. This approach earned them some flak at the time for being more of a bank than a p2p lending destination, but I always appreciated the approach of targeting a more mainstream segment of the population with more traditional banking and investment products that were nonetheless informed by some of the goals of the social lending movement. This seemed like an important complement to the other players that were more community-based, holding interest auctions or creating borrower profiles.

At the time of their arrival on the scene, I thought that this model might have ended up being the more long-lasting, but it appears that is not the case. PD has offered no explanation as to the reason for their disappearance, but I would speculate that the hybrid approach just didn't catch on.  Like Lending Club, PD is SEC-registered, so legal woes were probably not their challenge (as in the case of Prosper), but there was still something non-traditional in their tactics that lacked the appeal of direct borrower-lender connection that many entrants expected from the space.

Yet, while Pertuity Direct closes, the broader social lending space is still going strong. Lending Club is thriving, fast approaching their 25,000th investor. They, too, are seeking to take the p2p lending concept mainstream, offering a great alternative investment product for lenders and loan conditions for borrowers, and currently offer the best hope for the nascent industry in the US.

Saturday
Aug222009

Greennote Brings Peer-to-Peer Loans to Students

For today’s nearly 20 million American university students it is more expensive than ever to attend college or a graduate school program. And this year has been especially tough on students.

Greennote is young but promising P2P lending platform that specializes in education loans. Imagine Prosper meets VirginMoney meets Kiva: First a student verifies that he will be attending school and creates a borrower profile with an inspiring story of how a loan will support his education. Next, it is the student’s responsibility to reach out to his family, peers, and social network for the funds (even though there is also an option to solicit funds from the Greennote network that includes investors interested in lending to students with inspiring profiles). Lenders can invest amounts as small as $100 towards the student’s tuition, room and board, and other educational expenses. Once the student has raised at least $1000, Greennote proceeds with the process of collecting the funds, formalizing them all into one loan, and creating the legal binding contract.

The creators of Greennote have tailored their platform to the needs of students. The interest rate on all Greennote loans is a fixed 6.8 percent, much lower than most students will find from any private financial institution (which can range 8.5 to 20 percent). Loan repayment s can be deferred for up to five years while the borrower is at school, and after graduation there is a six month grace period until the monthly repayments begin. No credit check or citizenship is required. Additionally, schools can join in supporting students financially by offering loans through Greennote.

Between the fact that the number of students attending universities is only going to grow in the future and the fact that school tuition has been increasing at a rate higher than inflation, it seems that Greennote is operating in a promising niche market. Well-tailored services with a specific focus may represent the next version of P2P lending. Diverse and smaller P2P platforms that target specific needs can help bring more transparency and an even more direct connection for the appropriate borrowers and lenders. We will have to follow Greennote as it grows to see how its development unfolds.

 

Flickr Credit: stopnlook

Sunday
Aug022009

Why web capitalism matters

When a community of crafters passionate about "all things handmade" becomes the fastest growing selling side on the web, it is worth paying attention. In March 2008, Etsy faciliated $1.6M in sales in March 2008; by March 2009, that number was $12M. How did this niche marketplace become so hot and so beloved? When retail sales fell across the board over that period, how did Etsy record an 8 fold increase in monthly sales?

My take is that Etsy is creating value for both buyer and seller. Buyers get unique items that are sustainably produced and sellers generate direct income from their own creativity and drive. It's what Umair Haque would term : "thick value".

Similarly, when (mostly) Americans are choosing to send over $1M/week in loans to poor aspiring entrepreneurs around the world, usually in $25 or $50 incremements, something powerful is afoot. That level of lending is seen on Kiva alone. What is inspiring so many people to join the Kiva lending community?

Source: Kivalytics (a third party app)

I think that people are excited to get behind individuals who are seeking to build value through their own determination and hard work. Lenders are disillusioned by corrupt governments receiving aid but are inspired by stories of entrepreneurs creating organic growth in their countries. And many people fundamentally believe in the power of capitalism -- when properly done -- to best drive communities out of poverty.

Etsy and Kiva are among a number of value-driving online marketplaces that we've seen launch in the past several years that indicate real alternatives to the greed, recklessness, and imaginary profits currently associated with capitalism. Here are some of my favorites:

  • Samasource -- training marginalized people to perform basic internet-based tasks and connecting them with technology companies in need of those services -- "give work, not aid" (see more here)
  • Kickstarter -- providing a mechanism for creative people to fund their projects (see more here)
  • People Capital -- innovating an alternative rating mechanism to FICO for students, thus facilitating social lending for education financing (see more here)
  • Acumen Fund -- integrating investment banking approaches to international development (see more here)
  • Prosper Marketplace -- online auction market for p2p loans
  • Lending Club -- online financial community facilitating p2p loans
  • Lend for Peace -- connecting lenders to Palestinian borrowers (see more here)
  • Pertuity Direct -- providing alternative investment and borrowing opportunities by facilitating and bundling prime loans (see more here)

These sites matter because they are creating value and driving growth. They are building communities. They are enabling individuals to make meaningful contributions -- even if they are small. They operate transparently so people can make decisions confidently. They encourage creativity. They support entrepreneurship.