Entries in peer-to-peer lending (2)


As Credit Card Rates Increase so does the Potential for P2P Lending 

A recent article in the Washington Post sheds insightful evidence that P2P lending may rapidly scale in the coming years.  What drives its potential for growth?  High rates on credit card debt. 

The article highlights several interesting facts:

  • Industry experts predict a twenty-fold increase in the amount of money lent via peer-to-peer lending sites from close to $282 million in 2006, to possibly $5.8 billion by 2010.
  • P2P officials state that increased traffic is due to increased credit card rates; about 50 percent of Prosper's loans goes to borrowers trying to consolidate credit card debt.
  • Credit card companies are increasing rates more aggressively now in part because of a new law that is expected to take effect in February, after which it will be difficult to increase rates.  
  • Credit card debt today can have interest of up to 20 percent and take more than 20 years to pay off.  Meanwhile, peer-to-peer loans generally have half the rates and are generally required to be paid off in three years.
  • Investors are also gaining—the rate of return is 12-13 percent and the average amount invested is $6,000 (diversified across many borrowers).

We have yet to see what will happen when 2010 comes and most P2P borrowers reach the end of their three-year loan term (most began borrowing in 2006).  Nevertheless, the numbers in this article speak to the fact that peer-to-peer lending is filling a growing demand and it appears that it may soon cross the chasm from a model for a minority niche to one that serves a more general population.  If it is able to do so, peer to peer lending could permanently establish itself as a genuine competitor to traditional banks and credit card companies. 


The microfinance-subprime myth and is p2p lending for US small business?

The Wall Street Journal asserts that “many of the problems in Indian microlending might sound familiar to students of the US mortgage crisis” leading The Economist to ask: "Are microfinance loans the new subprime mortgages?"

In this disappointing take on the microfinance industry (the magazine refers to the reputable Accion International as a "global network of microfinance schemes"), one crucial differentiating factor (among many) between microfinance and subprime is neglected. In the subprime market bankers were reliant upon asset speculation -- real estate -- that caused them to essentially ignore borrowers' ability to repay. There is no such underlying asset blubble in microfinance.

I'm also intrigued by comments made by Beth Rhyne, Director of the Center for Financial Inclusion at ACCION, in a talk for her book Microfinance for Bankers and Investors that I heard last week:

"Banks are not necessarily the key movers. The real game changers are retailers, telecoms companies and others with new and stronger connections to the underserved, low-income market. And technology companies that bring in lower cost business models, like VISA’s government-benefit distribution programs."

This ability to deliver financial services without banks is an important innovation in the developing world and one with interesting parallels to peer-to-peer banking in the United States, another innovation that cuts out the bank. Later in her talk, Rhyne suggested that p2p lending will not take off in the United States for small entrepreneurs because here the barrier to entry of starting a small business is so high that most people who pass that barrier can also qualify for a loan from a bank. The evidence may be there to support that; from what I can see, most borrowers on American p2p lending sites are seeking loans to consolidate credit card debt rather than begin/expand a small business. Looking at Lending Club borrowers, only about 15 of the 91 notes currently available relate to small business demands.

I'd be interested to know what the players in the p2p lending space think of Rhyne's assertion.

Flickr credit: Meanest Indian