Simon van Wyk looks into the rising popularity of online peer-to-peer lending
According to the Wall St Journal, which cites Online Banking Report, a US-based research firm, about US$100 million in new person-to-person loans will be issued this year, and that will increase to as much as US$1 billion in new loans in 2010.
Of course, people have been borrowing money from each over for generations - families, friends and neighbours lend amongst themselves – and because of their close relationships, trust is not an issue. Now with the growth of the Internet, and the sophistication of online verification and credit checks, the emergence of peer-to-peer lending sites means there’s an infrastructure to go with it, and the lending and borrowing can now happen amongst strangers.
Consumers are flocking to peer-to-peer lending sites
It’s easy too understand why consumers are flocking to peer-to-peer lending sites like Zopa and Prosper and their increasing number of clones out there.
People are always looking for lower interest rates on loans and being able to sidestep the banks to achieve their goals is naturally compelling. At the same time everyone wants higher yields on their liquid assets. And more and more people are moving nominal savings out of the trusty, low yielding savings accounts and into the person-to-person online market to achieve significantly higher returns. It’s certainly an interesting way of diversifying their portfolio and earning money. Also playing a hand in the person-to-person lending revolution is that young people love social networking. And the idea of organised lending through such sites sits very comfortably with them.
Prosper has something like 330,000 users and has funded $70 million in loans. Meanwhile Zopa claims to have 150,000 members and that by bypassing the banks – they can offer competitive borrowing and lending rates with lenders looking at returns of up to 14 per cent and borrowers accessing loans with interest rates as low as 6 per cent.
Virgin USA enters the game
No surprise then that in May, some real financial muscle entered the game when Virgin USA, Sir Richard Branson’s North American investment group, purchased a majority stake in another peer-to-peer lending company, CircleLending which has been around since 2001.
The press release announcing the purchase quoted Frances Farrow, CEO of Virgin USA who said: “Financial consumers are increasingly self-directed, empowered and seeking the kinds of innovative alternatives offered by CircleLending. We’re delighted that our investment will form the foundation for a major new Virgin-branded financial services offering in the U.S.”
As the press release stated: “Our investment in CircleLending is consistent with Virgin’s focus on developing fresh approaches to consumer issues and challenging the status quo.”
Meantime, also making news in May was Facebook, the online social network which is rapidly becoming as popular as MySpace, when it launched its person-to-person lending service through Lending Club. With a view to making peer-to-peer lending more mainstream, Lending Club on Facebook has issued over US$100,000 of loans since its launch. The company generates revenue by collecting a one-time processing fee of 0.75% to 2% of the loan amount from borrowers and a processing fee of 1% of the installment amounts from lenders.
New clones in the online peer-to-peer lending space
Meanwhile across the globe, seeing the potential size of this market, other players are entering the online peer-to-peer lending space. Earlier this year, Dutch-based Boober.nl launched promising “no banks, better deals” and has made quite an impact. It has already funded loans totaling almost 1 million Euros.
According to Springwise, Boober’s founder, Guus Drijver, is very forthcoming as to why Boober is better for consumers than the banks. “Boober doesn’t work with hidden costs and is completely transparent. We don’t sponsor yacht races or soccer teams, and don’t have expensive headquarters or pay thousands of people high salaries.”
Hot on Boober’s heels, but not growing quite as fast is Germany’s, smarva.de with loan volumes over its first three months totaling 150,000 Euros, servicing about 50 loans. One reason for the slower growth is that about 70 to 80 percent of all borrower applicants are declined because of its strict validation process which includes calculating if the borrower’s financial situation is well enough to allow repayment of the desired loan sum.
Online peer-to-peer lending also looks like it’s also about to take hold in China with PPdai about to launch there. In China loans from family and friends are more commonplace than personal loans from banks, so the website will aim to facilitate such loans within a more formalised structure.
And coming soon to Canada, CommunityLend will open up its online community later this year revolutionising the way lending works in Canada.
Of course all these peer-to-peer lending sites have in common is that they service relatively small personal loans – certainly sub $10,000. And with peer-to-peer companies making their money through the fees they charge based on a percentage of the loan value, they are going to have to service a huge number of loans to become profitable.
That said, is it too far-fetched to see the peer-to-peer marketplace expanding and launching services for homeowners to finance purchases or refinances? Will we see prospective homebuyers logging on to a peer-to-peer lending site to request home loans in the order of $800,000 or more, stating the interest rate that they are willing to pay?
Maybe that’s for the future. But it’s undeniable that there is a lot happening in the online peer-to-peer lending space which may force wide reaching changes in financial services. It will be interesting to see what develops of the Virgin US acquisition of CircleLending.
Simon van Wyk is Founder of HotHouse Interactive. Comment on this story at the HotHouse blog.