One of the biggest challenges for a new internet startup to offer an innovative financial service is to gain the trust of its potential customers. Consumers approach new concepts with legitimate caution.
The book ‘P2P Kredite – Marktplätze für Privatkredite im Internet‘ examines how p2p lending services can address the uncertainties and what measures can be used to build trust. After a short introduction of how p2p lending works and a look at Cashare, Smava, Zopa and Prosper the author covers the aspects credibility, safety, reputation, guarantee, sanctions, information and communication. Fabian Blaesi also describes how community features can help.
In an empirical study the importance of several factors for the perception and acceptance of p2p lending services by lenders is quantified.
Most of the discussion so far was whether p2p lending is or could become disruptive – threatening the bank’s core business. So it was fast moving internet startups versus the incumbents which were often viewed as not very innovative.
As for social networks, the thoughts centered on how available social networks data could be used to improve the process of p2p lending service. See my article ‘For Debate: Can Data From Social Networks be Used to Reduce Risks in P2P Lending‘. Lending Club in fact aqknowledged in January that it already uses some social network data in it’s process.
Now there is an interesting speculation on the Finextra blog (read the comments, too) whether Facebook could compete with the banks and might enter p2p lending in this course. This is an interesting thought. But the main argument is that Facebook has a large number of users and if only a fraction of them would use financial services they could gain a huge customer base. With that argument you could argue that Facebook could compete in any industry. Just pick one you like.
And while cross border p2p lending would be fascinating the downside as we already now is that regulation differs widely between national markets. But Facebook could have the size to tackle a task like this. The real question is: Do they plan to?
I finished reading “Innovation and the Future Proof Bank” (available at Amazon.com, Amazon UK and Amazon.de). The author James Gardner publishes the Bankervision blog, which I am a long time reader of.
Gardner defines categories of incremental, revolutionary and breakthrough innovations and further differentiates between disruptive and sustaining innovation. The book discusses innovation theories and models. Many examples and case studies are given. While the topic is innovation in banks, I felt that much of it applies to innovation in large companies that are incumbents in other industries, too.
An innovation team will evolve through 5 capacity stages: Inventing, Championing, Managing, Futurecasting and Venturing.
Gardner propagates Futurecasting as a method to assess trends from a strategic perspective. By building scenarios the innovator creates descriptive images of possible future impact of trends in combination with the banks approach on it.
Gardner uses p2p lending as an example in many chapters. E.g. in chapter 4.4 he creates analysis possible scenarios in a futurecast on p2p lending. If you want to understand why so many banks currently ignore p2p lending as a trend the book offers some interesting arguments. However the other example often cited, Paypal, shows what happens, if banks wait too long without reacting.
The book contains a wealth of information, thoughts and examples. Too much to cope with in this short review. I enjoyed reading it and highly recommend this book to anyone interest in fostering innovation, the innovation process and how banks could react to an ever faster changing business environment. Buy your copy at Amazon.com, Amazon UK or Amazon.de.
P2P Lending is mostly anonymous and loans are unsecured. To make the risks of lending to a stranger acceptable for lenders, p2p lending services had to provide models for the lenders to judge the dimension of the risk of not getting paid back.
The initial estimation of the risk-level could not come from the platform itself as it had no track record and could not build a model that “calculated” the level of risk involved for the lender. The consistent consequence was that nearly all p2p lenders relied on established third party providers for credit history data and credit scores. Prosper for example showed Experian data on default levels to be expected depending on credit grade.
Over the time it became obvious that the actual default levels at Prosper were much higher than the expected default levels based on Experian data. We don’t actually need to argue here what led to this (be it financial development of the economy, be it that p2p lending attracted bad risks, be it a poor validation process), but the result was that since defaults were much higher than expected, lender ROIs were much lower than expected at the time of the investment.
And this is not Prosper specific. Several other p2p lending services show clear signs that default levels will (or have) surpassed the initially published percentages of defaults to be expected based on external data.
Boober failed due to default levels, on Smava levels are higher than the Schufa percentages fore-casted, same is likely for Auxmoney defaults which will be higher then Schufa and Arvato Infoscore data suggested. The one exception from the rule is Zopa UK, which successfully manages to keep defaults low, as CEO Giles Andrews rightly points out.
I always enjoy speculating what p2p lending developments might happen in the year to come and then look back in December to see how I did. I don’t dare call it forecast, because these are just my personal guesses, though in some cases it’s an educated guess based on what I know individual p2p lending services are working on at the moment.
More competition and entering more national markets (probability 100%) This is a fairly easy bet. There are many, especially European markets, where no p2p lending service is operating yet. Even accounting for the fact that laws and regulation in some national markets make it hard or impossible to establish a service, there is still plenty of room. Looking at an individual country, it is much harder to tell. I still wonder that there are no competitors to Zopa in the British market (yet).
More products (probability 100%) Currently nearly all p2p lending platforms only offer one product: unsecured, fixed term loans. The differences are more in the details of loan funding (bidding, no bidding, markets, listings) but not in the offered product. In 2010 we will see additional products (e.g. secured loans).
A bank will acquire an existing p2p lending service (probability <25%) While last year’s prediction was that there is the first bank experimenting with p2p lending (and there was), 2010 might see a bank (or other financial institution) buying a running p2p lending service. Buying will be much faster, cheaper and risk-less than if the bank tries to build a new service.
Today CommunityLend launched it’s peer-to-peer lending service in Canada. The service currently is available to residents of Ontario. Borrowers can use CommunityLend as an alternative loan source to bank loans or credit cards with the ability to set the desired interest rate themselves (CommunityLend sets minimum rates). Loan amounts range from 1,000 to 25,000 CAN$ for a loan duration of 36 months. CommunityLend is open for borrowers with a good credit rating (AA to C), which encompasses about 70% of the population.
The borrower has the option to define whether there will be an auction (competitive bidding) once the loan amount is funded, possibly getting him the advantage that the interest rate will be lowered during the auction time with lenders underbidding each other.
Due to regulation restrictions only lenders qualifying as “accredited investors” are allowed to participate as lenders. The minimum investment is 100 CAN$. Bids can be in multiples of 100 CAN$.
CommunityLend provides lenders information about borrowers to help them make decisions about lending, including; the credit categorization of the borrowers on the site (credit rating) , their assessed debt burden ( affordability rating), their assessed stability (stability rating).
CommunityLend actively steers lenders towards diversification with the rule that a lender can only bid a maximum of 10% of the amount of an individual loan and the bid maybe not more than 10% of his total overall investment.
Registration to the service is free. Borrowers pay closing fees of 1 to 2.5% percent of the loan amount depending on credit grade (minimum 75 CAN$) upon payout of the loan. Lenders pay 1% p.a. fee on the outstanding loan principal.
CommunityLend uses credit bureau data and bank account data to verify borrower identity.
The following video gives an introduction to CommunityLend:
I like the cheerful style of the website. All information is presented in an easy to navigate and easy to understand way.
