Entries in p2p lending (44)


Can P2P Lending Help to Loosen the Credit Crunch?


Uncrunch America offers consumers a package of tools to help them handle the credit crunchPeer to peer lending sites have undoubtedly had a more prominent role in the context of the financial crisis. Uncrunch America” is a an effort by a group of P2P and social lending sites— namely Lending Club, Virgin Money, and On Deck Capital—to build an awareness campaign that aims to “help resolve the credit crunch and rebuild the economy by delivering consumers with secure, trustworthy tools and infrastructure to finance necessary expenses and make critical investments.”

Along with the three lenders mentioned above, the support team also includes providers of personal finance tools and credit education such as Credit Karma and Geezeo. ChangeWave, a global network of professionals, is also a part of the team and helps to provide marketing and public relations support.

What is this coalition’s secret weapon? By joining powers (read as bundling) they can provide useful and demanded services to the American consumer in this time of need. According to their website, since the start of the year Uncrunch has distributed over $US 74 million (this number represents the amount of money lent via Lending Club, Virgin Money, and On Deck Capital).

There is no doubt that the tightening of credit from traditional lenders has created an opportunity for social and P2P lenders. But are consumers grasping the opportunity presented by untraditional lenders? It seems that lack of borrowers is not the problem. However, two of the three lenders on the Uncrunch team depend on individuals to provide the finance for loans and in today’s worried financial picture it is no surprise that individuals might hold on to their money as tightly as banks. As with any investment, lending through untraditional lenders is a bit of a gamble but most people today have lost their appetite for risk.

Although Uncrunch America provides valuable services for borrowers, questions remain about how it can increase the supply of financing for loans. This is where the real “uncrunching” begins.

Flicker credit: Happy Haggis



P2P funding alternatives for small businesses

Entrepreneur Magazine suggests to small businesses 5 ways to raise money today. Among them: Turn to the Web. "For a small amount of working capital, try peer-to-peer networks, which marry lenders and borrowers online. Though it's a relatively new concept, "over the next three to four years, peer-to-peer lending will take a significant leap in providing necessary capital to small-business owners," says Steve Bloom, an advisor and the former chair at SCORE's Atlanta chapter."

Where to start? While waiting for Prosper to come back on-line, try Loanio, Lending Club, and Pertuity Direct.


Does appearance reflect creditworthiness on p2p lending sites?

Successful Prosper BorrowersA study conducted by Dr. Jefferson Duarte of Rice University sought to determine whether physiognomy-based prejudices about creditworthiness existed and, if they did, whether they were justified. To explore this issue, he used data provided by Prosper, a peer-to-peer lending hub, to determine whether analysis of a single photo provided by the borrower could help predict whether he received full funding of the loan and whether he would pay it back in time.

So do looks affect perceived creditworthiness? As the Economist profiles, the answer is yes. Even more interesting is that these perceptions correlated highly with the borrowers' actual credit ratings.

To explore the issue, the researchers paid assistants to analyze the pictures of thousands of aspiring borrowers on Prosper. The workers rated them, on a scale of one to five, on how trustworthy they seemed, and estimated the percentage probability that each individual would repay a $100 loan. They also made assessments of the borrowers' sex, race, age, attractiveness, family status, and obesity.

The researchers reached two main conclusions:

  1. People flagged as untrustworthy by the assistants were less likely to be offered a loan. To have the same chance of getting one as those deemed most trustworthy they were required to pay an interest rate that was, on average, 1.82 percentage points higher, even when the effects of historical creditworthiness were statistically eliminated.
  2. The assessments of trustworthiness, and of likelihood to repay a loan, made by the assistants correlated with potential borrowers’ credit ratings based on their credit history, even when the other variables, from beauty to race to obesity, were controlled for statistically.

So while Prosper is a relatively information-rich environment where potential lenders have access to complete financial profiles of borrowers including credit grades, income, employment, and assets, this study suggests that there is a substantial premium put on the subjective factor of perceived trustworthiness. For individuals who look untrustworthy, the "faceless bank" might be a better option after all.

An interesting aside offered by the researchers is that although attractiveness and trustworthiness are positively correlated, there is no evidence that attractiveness is related to the probability of a loan becoming fully funded. There are other physiology-based preferences at work.

And showing yet another emerging role for peer-to-peer platforms, the "assistants" used the researchers were in fact workers from the peer-to-peer market laborplace, Mechanical Turk (owned by Amazon). Peer-to-peer sites then provided both the source of data for the study as well as the independent evaluations and perceptions.


Kiva's astounding stats for this week

Amazing. This week alone at Kiva:

$1,035,800.00 lent

4,982 new lenders joined

3,277 entrepreneurs funded

1 loan every 17 seconds

 These niche peer-to-peer marketplace for entrepreneurs in developing countries is demonstrating incredible vitality in an otherwise dismal market


Friends asking you for money?

Mainstreet today offers good advice to individuals who are finding themselves in the position of would-be lender to friends and family who have fallen upon hard times: Make the loan official. And consider using an official peer-to-peer lending site to facilitate.

The trend of using peer-to-peer platforms for everything from charity to student loans is up: "Virgin Money USA, which administers loans among friends and family members, says the dollar value of loans outstanding has soared to $390 million. That's nearly double from October 2007, when the company launched." As we've profiled, Virgin Money offers a way to formalize loans between people who know each other, managing the transactions and hopefully, reducing some of the relationship strain.


P2P lending as a new trend in philanthropy

The Boston Herald today cites peer-to-peer lending as a modernizing force in the ancient practice of charity. At a time when the need for non-profit services is higher than ever, direct financial exchange between individuals is emerging as a critical way to connect the haves and have nots. The article explains:

"The Internet has also spurred on peer-to-peer exchange, a movement that has changed the way people think about charity. Many donors – particularly in younger and more progressive demographics like the Boston area – want to feel connected to the people to whom they’re giving, want to understand the specific need and how their gift will impact the recipient.

Sites such as GlobalGiving, DonorsChoose and Kiva allow donors to select a charitable project by topic (children, animals, climate change), geographic region (Bosnia, Zimbabwe, Guatemala), or specific project (classroom supplies, skills training, vaccines). This customized giving has made it possible to help others in ways not imagined just a few years ago."

Research suggests that people give to charity because they want to give back and to feel connected. Internet P2P venues offer an incredibly easy way to make those connections and to make a difference through sums as small as $25 loaned to a entrepreneur through Kiva to as large as you want to provide to help public schools through DonorsChoose. As the article states, charity is also big business --Giving USA puts the 2007 total at over $300 billion-- suggesting that p2p lending platforms have plenty of space to grow.

Flickr Credit: Benevolink



China: The Newest and Oldest Fan of P2P Lending

,According to an article published earlier this month, p2p lending is gaining traction in China. The inability of individuals and small firms to access credit from state-owned banks has spurred internet p2p lenders, such as leader CreditEase, to fill the unmet demand.

Unlike p2p lending in the West, which is generally viewed as a new and innovative approach to lending, China is more familiar with the concept. Along with various other informal lending schemes, loans between individuals are legal and common in China. According to some estimates, informal lending might account for 10 to 20 percent of the country's total lending. Thus, the emergence of platforms like CreditEase are more indicative of a change in venue—the internet instead of the street—rather than a new access point to credit.  This may help explain the Chinese government's relaxed response to budding internet p2p lenders.

Innovative or not, CreditEase has generated US$29 million in loans since 2006.  Although much smaller than p2p giant Prosper, this amount is close to the US$33 million loaned by Kiva after about 3 years of operations.  The platform operates by selecting borrowers and then diversifying investors' funds among numerous loans. With reported returns of over 12 percent, and defaults under 1 percent, CreditEase seems bound for smooth sailing.

What will be interesting to see is whether the demand for CreditEase’s services will continue to grow. China’s loosening of credit quotas for commercial banks (by 5 percent) and local commercial banks (by 10 percent) may have an impact on the growth of p2p markets in the country. A recent article on credit in China mentions that informal lending flourished when credit quotas were in place and that the recently observed increase in bank loans may partly represent a flow from informal to formal lending.

Flicker credit: upton




P2P student loan platform People Capital secures financing

In an show of vitality rare in this economic climate, People Capital, the innovative marketplace for student loans, secured second round financing from the private equity firm, the Radcliff Group Inc today. The company matches borrowers to lenders exclusively in the market for student loans, helping philanthopic groups, individuals, and institutional investors better evaluate prospective borrowers who may not have any credit history. Because students usually have low FICO scores due to their minimal borrowing history, they are often seen as high risk by lenders and in a tight credit market, they may find it difficult to get a loan.

People Capital aims to change that. With a new risk methology created at Wharton, the company seeks to give a better picture of creditworthiness of young borrowers. Here is their approach: "We apply cutting-edge strategies from the credit card industry. Our patent pending Human Capital Score underwrites students without credit history, FICO scores or co-signers by projecting individual income levels and ability to pay indebtedness. We incorporate GPAs, standardized test scores, college and major to provide a true and unbiased, data-driven measure of the economic value of an education."

With Fynanz shut down, People Capital is the exclusive p2p lending platform focusing on student loans (and most student borrowers probably wouldn't qualify to borrow on Prosper or Lending Club anyhow). It's an interesting proposition, betting on the ability of education to enable young individuals to reach their potential value.


Looking to try out P2P Lending?

See the possibilities with our new P2P Lending Primer


Kiva introduces its API

Kiva, the first p2p micro-lending website, is opening its doors to third party developers. Build.kiva.org is its new destination for developers looking to expand its micro-lending platform. Its blog explains:

Our website has already done so much to connect people and bring new opportunity to the developing world, but it is nothing compared to the impact we think that technology and microfinance together will have to alleviate poverty. It is going to take a lot of innovation, a lot of creativity, and a lot of passionate people bringing the opportunity of loans to places they’ve never been.


By opening up its data and enabling independent, inspired developers to create applications, Kiva hopes to further connect its community and expand its reach. This move shows that the non-profit continues to be a model of both innovation and transparency.



Microfinance as tool for current economic crisis

For a microfinance argument for “thinking small” in response to the global financial crisis, see Elisabeth Rhyne’s article in the New York Times. The managing director of the Center for Financial Inclusion at Accion International, Ms. Rhyne argues that the traditional relationship banking practices of microfinance institutions offer a refreshing alternative to the opaque banking practices criticized in the G-20 report presented at this year’s World Economic Forum in Davos.                         

 The characteristics of the microfinance model are appealing:

  • Character-based lending
  • Stepped lending, where prompt repayment is rewarded with gradually larger loans
  • Group lending, where borrowers cross-guarantee each others’ loans
  • Loan approval based assessment of a customer’s ability to repay from existing income rather than speculated future asset value

Even more encouraging is that this model can result in a powerful and resilient portfolio of loans while maintaining social awareness. Lenders can have faith in their investment returns while contributing towards what Rhyne terms a “distributed global banking grid” with many nodes and fewer single points of failure.

Flickr credit: herval



Regulation troubles mean slowdown for some markets

Alternative markets are being tra markets and the government is going to treat them as such. The prediction market Tradesports is now permanently shut down due to gambling laws, p2p lending market Prosper will be off-line for months dealing with the SEC, and the viability of craftsmen on Etsy and many other direct seller-consumer markets is threatened by legislation soon coming into effect and more legislation to come. What does this all mean?

Perhaps most importantly, the previous sky-is-the-limit land of innovation in markets is retracting. It took them some time to get started, but government lawyers are hard at work writing cease-and-desist letters and new laws that may spell doom for smaller or newer entrepreneurs in this field. Ventures that survived by operating in gray areas slightly out of reach of the regulators will find that they can hide no longer.

Government involvement in a sphere that was a demonstration of nearly pure capitalism is both regrettable and necessary.  The consensus that regulatory and policy failure contributed towards the current financial crisis and allowed the likes of Bernard Madoff to flourish required the SEC to explore hidden markets and register all sellers of securities. Recent tainted milk and leaded toy scandals in China naturally lead the government to require higher product standards for children’s products and cosmetics. 


Unfortunately for Prosper and other p2p lenders, the SEC’s actions have the most profound and immediate impact upon them, as they need to shut down (Lending Club is still open) while they spend hundreds of thousands of dollars to go through the bureaucratic process of licensing with the SEC (this is a lot of work for an organization whose average loan in 2008 was $6,047).

For small sellers of cosmetics and other homemade items, January may prove to be their last month in business as they are the forced to prove the safety of their items as dictated by the Consumer Product Safety Improvement Act (CPSIA) and the FDA Globalization Act of 2008. Due to immoral practices of Chinese manufacturers, small businesses will now need to spend thousands of dollars a year in paperwork in order to prove that their $2 homemade soaps do not contain high lead concentrations. Paradoxically, the large toy corporations who practice the outsoucing that is so feared by some American consumers will be most able to comply with the new regulations while the small crafters who make items at home using organic wool will be out of luck. The reaction by the Etsy community makes clear that many crafters will simply be forced to close down shop.

It was probably only a matter of time from the beginning for Tradesports. Their entire business model was based upon skirting gambling laws through technical operation out of Ireland, although the majority of their trades knowingly took place in the U.S. It will be interesting to see whether its non-sports affiliated site Intrade (the more innovative and interesting market I would argue) will last.

As many of the best entrepreneurial teams pushed ahead over the past several years with their alternative, and often quite persuasive, ideas, many free market enthusiasts (like myself) found it hard not to get swept up in the excitement and see these as the undenaiable future. Expectations are now revised down from their initial irrational exuberance. These upstarts have a number of hoops yet to pass through, but their promise is still bright.


Is social lending a quaint concept?

An interesting factor common to many of the new alternative markets is the element of simplification: fewer steps per transaction, smaller dollar sums exchanged, and the reduced role of the middleman. To advocates, these characteristics are symbols of transparency, greater citizen engagement in the process, and a sustainable and informed approach to financial decisions. To others, the simplicity is a negative; the transactions are nearly medieval in their marketplace structure, the systems are inefficient, and there is no possibility of scale to make them true viable alternative financial constructs.

The origin of peer-to-peer lending is indeed older than medieval; Prosper’s website marks its advent as 300 AD in China. We have made vast progress since then in terms of efficiency and scale, and it is really only with the possibility of the internet and the growth of social networking that we find a renewal of this simple form of direct lending. Unexpectedly, the latest technological advances have enabled us to draw upon and revive ancient financial practices. Direct lending allows people who have otherwise been shut out of the complex credit market due to factors sometimes out of their control to turn to the old and trusted practice of asking the people around you to lend you a buck. Only now, the “people around you” are the millions on the internet.

Lending to a self-professed “entrepreneur” half way across the country (or world) is not quite the same as lending to your cousin, but these days, just knowing the destination of your money is a significant move towards transparency and accountability. But with this level of engagement in every single transaction you make, it’s true that the possibility of scale is lost. Evaluating potential borrowers on Prosper or Lending Club and then monitoring each loan you choose to make is a lot of work. The sums are small (maximum investment on Prosper is $25,000 and the default rates are high (on Prosper, 20%). Unless you are working with a small sum of money, alternative markets in their current form can only be utilized as an interesting and supplementary subset of any financial strategy.


What are alternative markets and what elements tie them together?


Peer-to-Peer lending markets, local stock exchanges, prediction markets, direct buyer-seller community markets…Innovative re-inventions of the traditional marketplace, all made possible by web technology.


While the current financial crisis shakes the confidence of many free market believers, there glows a series of alternative market movements still enthusiastically embracing the core market essentials. These markets connect buyer to seller while rejecting the opacity and complication that characterizes much of our current financial framework. Their missions are generally simple and focused, encouraging participants to be knowledgeable of the market dynamics, with the end goal of fair and efficient trades between individuals and better information. These alternative markets can be classified into four major types:

  1. Peer-to-Peer (aka Social) Lending Markets.  This concept is a type of financial transaction where two parties can enter into a borrowing/lending agreement without the intermediation of a traditional financial services provider. See: Prosper, Lending Club, Kiva.

  2. Prediction Markets.  With the marketplace able to tap into the “wisdom of crowds”, prediction markets have emerged as a venue for speculating about the future. See: Intrade, Betfair, Futarchy.

  3. Community Markets.These sites allow buyers to get to know and interact with their sellers and buy from them directly. See: Etsy.

  4. Local Markets.  As the stock marketplace has moved increasingly global over the years, local investing enables individuals to instead invest in community companies that they know and trust. See: Locavesting.

Utilizing the efficiency of the market for the traditional purpose of exchanging goods, services, and information, these emerging concepts spin the concept to meet their niche purposes. The rise of alternative markets indicates some interesting trends of our society that have implications well beyond the marketplace.

First, there is a clear desire by market participants to introduce a level of transparency in financial dealings. Each of the social lending services works on a peer-to-peer basis, so you as an individual loaner know who is receiving your loan. This is a very different operating model than giving your money to a black box financial services company that makes decisions on your behalf. As we have seen, that model does not always make the decisions that are in the best interest of the lender. Similarly, with locavesting, rather than invest in a large corporation where you have no insights into its inner dealings (e.g., Enron, Worldcom, Global Crossing), you can invest in a neighborhood store or local company where you may actually know the management, see the customers, and build a more rounded perspective of the entity’s value.

This leads to a second trend, a lack of faith in experts.  Recent events point to the danger of trusting an individual (e.g., Bernie Madoff) while past events warn of ascribing too much faith to a group (e.g., the whiz kids of Long Term Capital Management). With economic experts and pundits of all stripes constantly pontificating their chosen strategies and predictions, it is hard to sort through the noise. This challenge was perhaps best illustrated during the November election when news agencies released daily polls accompanied by salient expert analysis that were often contradictory, repetitive, or incoherent. One of the best and simplest resources to get to the bottom of the single question, “Who will win in November?” was the prediction market Intrade, which harnessed the collective knowledge of its users to produce a startling accurate prediction of the final results (prediction of Democrats-Republicans 365-173 versus actual results of 364-174). The concept of futarchy takes faith in this concept a step further and suggests that prediction markets can be used to guide public policy decisions. Social lending services also indicate a desire for individuals to take control of their financial decisions rather than relying on the recommendations of experts. There you can manage the risk, evaluating potential lenders (or investments) yourself.

While alternative market participants personally gain from increased transparency and better informed decisions, all of the markets also demonstrate a commitment to building a community. Some peer-to-peer lending service operate under a “family and friends” model and all of them stress that the investment is not just a personal investment for return, but also a way to help fellow market community members achieve their financial objectives. Similarly, the direct artist-consumer model integrates social networking to make purchases more of an experience where you can get to know the person you choose to buy from, and in the process strengthen the artist community. Locavesting is at its core investment choices that support and sustain the local community.

Emerging market movements indicate that even in a time of bailouts and stimulus packages, capitalism is still alive and growing. Markets are evolving and individuals are having a say in that evolution. Many of these markets are now facing challenging times, however, and their future will say a lot about how our society and government value the marketplace.

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