Could Social Networks be the Next P2P Lending Players?

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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?

People Capital Post Launch Figures

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First figures about lending activity on p2p lending service for student loans People Capital (related articles: People Capital) which launched earlier this month say that so far five to six students received loans for a total of 100,000 US$ from 5 lenders with another 45 students awaiting funding.

Lenders must have accredited investor status to lend. Financial institutions can sign up as lenders, too.

More details in this New York Times article.

Lending Club Default Rates Higher than Initially Expected?

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Back in January I received an email from a Lendingclub employee in reaction to this article, where I wrote:

“… Several .. 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. … The one exception from the rule is Zopa UK, which successfully manages to keep defaults low…”.

The email questioned why Lending Club was not mentioned along Zopa for keeping defaults low and invited me to discuss this. On Jan. 21st I replied with the following (based on numbers which I compiled from Lendingclubstats.com – these will have changed slightly since then by now):

As sample let’s look at the loans Lending Club issued in Dec. 2007. Total loan amount is 1,322,850 US$.

The status of these is:
a) Current 823,800 (62,3%)
b) Fully Paid 168,150 (12,7%)
c) Late 82,500 (6,2%)
d) Defaulted 248,400 (18,8%)

These loans were approx. 2 years old (in January) and will run about 1 year more.

Is it a fair assumption that in Jan 2010 22% (or more) of the loans issued will have defaulted? I know I did not take the final step to split these numbers by credit grade, but if I would have done that, are you arguing that the default levels are low (or at least lower than the scoring predicted in Dec 2007)? If Dec. 2007 is for some reason a bad performing month, feel free to do the above with any other month from 2007 for the discussion and we continue with these numbers.

Though I was promised a detailed answer and I did follow-up several times, so far there has been no reply. I am not saying that Lending Club defaults are too high for lenders to make a profit. My points are:

  • Default levels at Lending Club are likely higher than initially expected
  • The published default rates on Lending Club and other p2p lending platforms are often averages in relation to all running loans (including recently funded ones). This figure is skewed, if the service is growing fast and lenders might misinterpret it. A better  evaluation is based on taking a sample of older loans (e.g. based on one month of origination)
  • ROIs for Lending Club lenders will be, once their investments mature, likely lower than the average shown at the moment at the Lending Club statistic page.

Funding Circle Raises 1.1M to do P2C Lending

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London based Funding Circle has announced that it has raised 1.1 million US$ form undisclosed private investors and will launch it’s p2c lending service Fundingcircle.com in Q2 2010.

Director and co-founder James Meekings informed P2P-Banking.com:

When the platform launches later this year, people will lend small amounts to a range of different, creditworthy businesses to spread their risk. In turn, those businesses will be borrowing from a multitude of people to get a lower interest rate. … Funding Circle will also empower people to support their local community, by allowing lenders to target businesses with characteristics, such as locale, that are valued by them.

Small businesses will initially be able to apply for unsecured loans of 5,000 to 50,000 GBP. The businesses are checked for fraud and must meet a number of minimum credit requirements verified by the UK’s leading credit agency. Experienced underwriters then further analyse and screen businesses before allowing them onto the Funding Circle platform.

MyMicroCredit – P2P Microfinance to the Needy

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Karl Rabeder was a successful entrepreneur and rich. But being a millionaire did not make him happy and he was seeking a purpose in life. So he sold his villa in Austria, his house in France and his 5 sailplanes and moved into a small 1 room apartment in Innsbruck.

Now he dedicates his time to the p2p microfinance non profit he founded: MyMicroCredit.org. MyMicrocredit enables lenders to fund loans to needy persons in Latin America, Asia and Africa with the objective to become self-employed. Currently MyMicroCredit partners with the MFI Apoyo Integral in El Salvador, Nicaragua, concentrating on funding education projects for agriculture teachers.

I contributed 25 EUR towards a 24 months loan. The website display of projects (see left) bears resemblance to Kiva. No registration is necessary to lend. This allows fast and easy funding but has the disadvantage that lenders cannot login to see a portfolio of what loans they did fund.

Lenders will by notified be email upon repayment of a loan and can then decide to reinvest or withdraw their money.

(Sources:  Chrismon, P2P-Kredite.com)