business model

Smava Changes Business Model; Brokers Bank Loans

wiseclerk

German Smava, launched 2007, yesterday announced that it will offer more products and evolve into a marketplace where borrowers seeking loans get multiple offers. The site logo and layout have been redesigned to reflect this change. Smava said p2p loans will be continued to be on offer and the new products (bank loans) added will give the borrower more choices.

My take on this – what does Smava achieve with this change?

Smava’s new loan volume was static since mid-2010. With the current change Smava:

  1. can increase revenues. Since borrowers can be offered more loan terms and get multiple offers from banks, the probability of a sale increases. That bank loans need less explanations than innovative p2p loans further spurs this. Smava earns lead and sales commissions from the banks.
  2. can justify high marketing costs to acquire the borrowers better now as the resulting traffic is more efficiently monetized. Unlike before Smava no longer needs to balance demand and supply (borrower growth versus lender growth) but instead can totally focus on marketing to borrowers.
  3. decreases costs, as the intense vetting of loan applications (of which about 90% were rejected) is no longer necessary in most cases, since the bank does it for the referred applications

Why does Smava still keep p2p lending?

The question is not if Smava will continue p2p lending (the announcement said they will), but rather if Smava will continue development on that offer. That is unlikely since little happened in the last years. My assumption is that Smava keeps p2p lending on offer mostly for PR and marketing purposes.It allows Smava to position itself as different to loan brokers and loan comparison sites and keep a little of the image of financial innovation attached to the site. Continue reading →

Mind-Boogling

wiseclerk 2 Comments

Free by Chris Anderson is one of the most thought provoking book, I have read in the last few years. Anderson argues convincingly, why most digital products will end up being priced at zero – free. And he show the reader how this could be turned from the author or musician, that created the content, to an advantage instead of a threat to his profits.

The book gives ample examples. You may have already heard of the electric cars that Better Place wants to roll out. But how can Better Place offer a free car? And still allow the user to benefit from lower operating costs than with a conventional car?
One sector that still has to embrace ‘Free’ seems to be the financial service industry – there is only one mention of Zecco, no other financial service let alone banks is among the examples.

Anderson takes wide strives into history, philosophy and science fiction literature. The topic being pricing models and pricing strategies it will still appeal to a readership beyond economists, since it is interesting and entertaining to read.

Above all I found it inspiring to consider the outcome of further sectors embracing ‘Free’ instead of  viewing ‘Free’ as the enemy.

I recommend the book.

Instead of buying the paper version you can read it for free online (limited July 2009 EDIT: this link works only from US, see below (next page) to read outside US) or download the audio book version free.

Continue reading →

For Debate: A Flaw in Current P2P Lending Models?

wiseclerk 9 Comments

P2P lending holds great promise: more transparency, purposeful direction of investments and economic advantages for borrowers and lenders. Some even talk of democratization of financial processes.

But are advantages and risks evenly balanced between borrowers and lenders?

For the borrower p2p lending fulfills most promises and the only risk is that the desired loan goes unfunded. Most services have a simple fee structure with no hidden fees and the borrower only pays fees when he does receive the wanted loan. And within a time frame of a few weeks after sign-up the borrower reaches his goal – once his loan is funded and the money is transferred to his account. Platforms with auction mechanisms can even benefit the borrower further in supplying the loan at a lower interest rate then the maximum he set.

The lender on the other side is promised an attractive return on investment but faces multiple risks:

  • borrower fails to repay the loan
  • (identity) fraud
  • p2p lending company fails and ceases to service loans (e.g. Boober Netherlands)
  • unreliable forecasts of ROI and default rates
  • on some services: open/undefined tax and legal issues
  • on some microfinance services: currency exchange risks
  • on some microfinance services: risk of MFI failure

There is also an information asymmetry. The borrower usually has most of the information he needs in advance and the information he has is accurate. Should the information be not accurate (e.g. wrong information on at what interest rates he can be funded) then he can retry at no additional costs only incurring a delay. The lender has information, which is partly based on estimates or forecasts that might prove unreliable and other parts of the information might be untrue (e.g. borrower reported income or borrower description of purpose of the loan). For privacy reasons it might also be a subset of the information the p2p lending service itself has on the borrower (e.g. town of residence omitted, or income or jobs listed only in categories instead of values).

The lending experience of the lender is further hindered by the timeline. The problems may impact him at any point in time of a several year loan term. And he either has no way to terminate his investment immediately or if there is a secondary market he might be only able to do so by accepting economic disadvantages in return for the option to selling off.

The situation of the lenders in this comparison to the borrowers is worsened by the alignment of interests of the p2p lending service company with the borrowers. This is due to several factors:

  • in most models borrowers pay the larger part of the fees and are thereby important for the revenues
  • in some markets attracting borrowers is the limiting factor for growth
  • for obvious image and marketing reasons the p2p lending company is not eager to share information on fraud and (in some cases) default details
  • for the same reasons companies are slow to react and change their lender information when real default levels are much higher then fore-casted (or even advertised) default levels (examples are Prosper, MYC4)

This imparity results in different levels of satisfaction with the p2p lending service for lenders and borrowers. While those p2p lending services that offer (unmoderated) discussion forums have only few unsatisfied borrowers voicing their opinion (and then mostly on technical issues) lender concern and critic rises over time on some of these services (to the extend that Prosper even deleted it’s forum at one point in time).

Continue reading →

Free-riders on the p2p lending bandwagon?

wiseclerk

In Germany at least four companies developed an approach that makes use of the media hype on buzz words like peer-to-peer lending or social lending.

Under the headline peer-to-peer lending they offer kind of a "dating platform" for borrowers and potential lenders. To attract borrowers they offer hope – even borrowers with bad credit history have the chance to get a loan. To the lender they promise high rates. But a close examination of these services reveals that one could just as good publish a classified in a paper to seek or offer a loan. The services do nothing but store the requests in a database, match them and inform both sides by email once a match was made. It is then up to the borrower and the lender to negotiate the loan terms, a contract, handle the money transfer and the repayments. Since they are not handling the money, the services are not regulated by German regulator Bafin.
Oh I forgot, the services do something else: they (at least 3 of the 4 I am aware of) charge the borrower a registration fee of about 9.50 Euro (approx. 6.75 US$). Note that the fee is not tied to a successful loan match but payable upon registration.

No wonder a German consumer protection agency cautioned against the use of offers like these. Calling it peer-to-peer lending might not technically be a false claim, but these services are worlds apart from comprehensive services like Zopa, Prosper and Smava.

P.S.: No I did not name the companies here in order not to give them more free traffic. The media already did that enough, because they often do not research enough.