Will P2P Lending be Disruptive?

In this – rather long – article I’ll examine if and why p2p lending has the potential to become disruptive and displace the “conventional” way banks hand out consumer loans.

A good read to get some opinions before continuing is reading these posts:

Zopa blog: ‘Why the banks need Zopa‘, which led to the post of
James Gardner,  ‘Zopa’s strategy is to be immaterial to banks‘, which was contradicted by
Chris Skinner,  ‘Why social finance and particulary Zopa matters‘, countered by
James Gardner: ‘Followup: Zopa isn’t disruptive

What is a disruptive innovation?

Wikipedia gives the definition that Clayton M. Christensen has coined in 1995:

Disruptive technology and disruptive innovation are terms used in business and technology literature to describe innovations that improves a product or service in ways that the market does not expect, typically by being lower priced or designed for a different set of consumers.

Disruptive innovations can be broadly classified into low-end and new-market disruptive innovations. A new-market disruptive innovation is often aimed at non-consumption (i.e., consumers who would not have used the products already on the market), whereas a lower-end disruptive innovation is aimed at mainstream customers for whom price is more important than quality.

Disruptive technologies are particularly threatening to the leaders of an existing market, because they are competition coming from an unexpected direction. …
In contrast to “disruptive innovation”, a “sustaining” innovation does not have an effect on existing markets. Sustaining innovations may be either discontinuous (i.e. “revolutionary”) or “continuous” (i.e. “evolutionary”). Revolutionary innovations are not always disruptive.

There are multiple examples in the Wikipedia article. I want to give two others here. The newspapers ignored or at least failed to adapt to what the internet meant to their classified ads business. As a result they were one of the first to loose offline business to totally new competitors (multiple ad sites, Ebay,  Craigslist and others). The music industry fought a downhill battle not to let CDs be replaced by replaced by (initially pirated) digital distribution.

In both cases the shift to the internet was inevitable, because the new technology offered a better process with superior customer experience at lower cost. The question here is if, had the dominant players faster reacted to the new medium, would they have retained (a larger part of) their dominant market position?

Cutting out the middleman?

One of the argument of p2p lending companies is that they are “cutting out the middleman”, meaning the bank out of the lending process. The way p2p lending works today, that is an argument open to attack. Continue reading

Working Paper of the Federal Reserve Bank San Francisco on P2P Lending

The Federal Reserve Bank of San Francisco has just published a 19 page working paper by Ian J. Galloway on “Peer-to-Peer Lending and Community Development Finance“. It examines Kiva, Zopa, Prosper, MicroPlace and Lending Club.

Quote from the conclusion of the article:

While online platforms may never replace conventional lending institutions, such as banks, it is important that the community development finance industry be aware of this emerging technology. Moreover, P2P finance platforms will continue to evolve—allowing for third-party issued loan sales, for example—which may fundamentally alter the way credit is allocated in the future. In either case, the potential community development finance implications are too significant to ignore.

Topics on the Kiva Conference Call

Today was another conference call by Kiva with its lenders.

Kiva informed about the situation of Fundación San Miguel Arcángel (FSMA), a field partner in the Dominican Republic, who is unable to repay lenders and will soon cease operations.

On the question, why Kiva does provide fewer translations, Kiva explained that they have a hard time to find enough volunteers to translate all texts. Another factor is the limited availability of engineering time to improve features related to translation.

Kiva decided in August to not provide translations to English for some loans. In this “non-translation experiment” Kiva will try to measure the effect of omitting the translation on the funding rate and speed.

In the discussion on the currency risk Kiva asked for feedback from the lenders on which information should be presented. One suggestion was to make the information that a currency risk may occur more eye-catching in the loan selection. Consensus was that currency risk information is more important for “power” lenders than occasional, infrequent lenders.

One third of the time of the engineers is spend on MFI and volunteer related issues. One third is spent on lender related (interface, features) issues. One third is spend on maintenance, bug-fixing, system issues.

Conversion rate: Of 100 people visiting the website, 8 make a loan.
40 percent of the people who put something (loans) in the basket, do not complete the check-out.

P2P Lending Companies Show Strong Growth – Aug. 09

P2P lending services continue to grow. In some markets the speed of growth has even accelerated.

P2P-Banking.com has created the following overview table listing services in operation and ranked them by loan volume funded in the past 6 months.

This image may be reprinted on other internet sites, provided it is not altered or resized and the following text (including the direct link to this article) is given as source directly below the image:
Source: P2P-Banking.com

For some service like the Korean Moneyauction and Popfunding no figures were available. Also omitted are some services that did not reply to information requests.

Note that Prosper.com was closed for most of the observed time span and did not make the minimum cutoff for the table. Also note that Zopa Italy is currently closed.

For a table listing more p2p lending companies check previous P2P Lending Companies by Loan Volume – Jan. 09.

Especially british Zopa and the German services show strong growth lately. Smava nearly doubled loan volume in July compared to June (chart), whereas Auxmoney tripled it (chart). At Smava currently even 25,000 Euro loans (approx. 35,750 US$) are funded with bids in only 4 minutes (!) bidding time (example loan).

On the other hand MYC4‘s growth slowed in the last months (chart) due to problems with the providers loan picks.

Benefits of Investing in P2P Lending via Lending Club

Lending Club lenders have invested more than 45 million US$ in loans to fellow borrowers. Not yet a Lending Club investor?

You might off by watching this presentation, which was recently webcasted by Lending Club to lenders. The 30 minute presentation lists benefits and explains the basics on how the website works.

Since it is marketing material it does show a very rosy picture on the numbers, but you can crunch all figures for yourself on Lending Club’s statistic page (e.g. change observation to loans issued from June 2007 to June 2008).

If you are ready to start investing at Lendingclub. com you can sign up here.

First Prosper.com Note up for Trade on Trading Platform

Prosper.com picked up speed again fast after the relaunch. As of today there are already more than 500 loan listings open for bidding. 5 loans already originated, despite the short timespan since re-opening.

Today I saw the first note for resale on the note trading platform. It is sold in auction mode where lenders can bid (sealed bids) during a seven days auction. Currently there are four bids. Would the auction end right now, then the buyer would purchase the note at a steep discount (40.4 Cents on the dollar). But I am sure bid prices will rise fast when more lenders discover that there is now activity on Prosper’s secondary market.