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02/05/2008

This P2P song sounds so familiar.

By Tim McAlpine

My credit union and banking RSS feeds are full of peer-to-peer lending articles. It is early days and everyone is sussing out where P2P lending fits into the financial services landscape. If this topic is new to you, here's a Wikipedia definition:

Person-to-person lending or peer-to-peer lending is lending done between individuals circumventing the bank's traditional role in this process.

Community lending had the advantage that people's interpersonal relationships fostered increased fiscal responsibility. The risk was that without the benefit of diversification, when something went awry the entire community could suffer.

Lending through banks has benefited from scale and diversity. By pooling the available money supply and lending it out again, the impact of any one default would be trivial in light of the timely payment of the vast majority of the notes. The downside to this model is that it has introduced greater transaction overhead and removed community loyalty from the equation.

New ventures are seeking to blend traditional practices with new scale economies via online marketplaces. The marketplace serves many functions. Most notably it facilitates bringing borrowers and lenders together. Furthermore, it simplifies what might otherwise be a cumbersome process to properly document and service the resulting loans.

It is hoped not only that these new markets will be more efficient by removing the bank as middleman, but that factors leading to default can be mitigated by reintroducing a social component to the mix.

I have been following a number of P2P discussions with great interest. Between the arrival of Zopa in six US credit unions, the growing number of P2P players entering the North American lending space and the disingenous marketing tactics of some of these players, there is a forboding feeling that P2P lending is not a flash in the pan.

How does P2P lending affect your credit union? I believe it will have a huge impact in the not-too-distant future. You need to understand it and develop strategies to embrace it. It should not be ignored.

This feels like déjà vu. The emergence of P2P lending is eerily reminiscent of the early peer-to-peer music sharing days. Out of nowhere, a very young Shawn Fanning introduced Napster and the recording industry was changed forever.

Replace the young Shawn Fanning with the older, wiser and richer, Richard Branson, replace music with money and replace illegal with above board and you get the picture of the potential impact that P2P lending will have in the financial services world.

The music industry's answer was to use the law to take down Napster, use digital rights management to throttle the inevitable tidal wave of file sharing and litigate against the common man in hopes of striking fear into the general public.

This took the music industry's eye off the ball as legitimate players like Apple's iTunes, Rhapsody, eMusic and Amazon swept in to fill the void. The ultimate victor in this bloodbath is the consumer with ease of use and instantly available legitimate access to music. Mega record stores are soon to be a thing of the past.

What can we learn from this parallel musical universe? Where will your credit union be after the P2P lending music gets cranked up to 10?

Comments

1) Morriss Partee @ Feb 06, 2008
http://everythingcu.wordpress.com

Great post, and your title inspired me to respond with some rock and roll.

Looking forward to seeing you in Indy in October, if not New Hampshire for BarCampBank NewEngland in April.

2) Andy @ Feb 06, 2008
http://theculoop.blogspot.com

I suppose it depends on how credit unions respond to this new industry. If we could offer an interface similar to these P2P lenders or get on board with a company like Zopa, who already has shown interest in partnering with credit unions, it could become a huge selling point for credit unions instead of something to be scared about.

I guess I would say, get your CU involved in P2P lending and crank that music up to 11!

3) Gene Blishen @ Feb 07, 2008
http://www.tinfoiling.com

Tim, Still can't figure out a few things. Checked Zopa and the first entry is a request to pay off a 10.75% credit union loan with an offer to fund for 9.99%. This is an unsecured loan. Great stuff but when you lend you need to assess risk and loan rates are usually set in some part by risk. Before you lend you need to see the reality of it being paid back. Could someone point to the delinquency factor with this P2P lending? The blogosphere is going to have some interesting posts in the future from the lenders who aren't getting paid back. Caveat emptor.

4) Tim McAlpine @ Feb 07, 2008

@Gene - I agree with you. I am definitely foggy on the inner workings of P2P lending. You would know far more than me on the financial side. At best, I know marketing math! But from a pure marketing and hype point of view, P2P is certainly making headlines.

5) Richard Smith @ Feb 08, 2008
http://www.customwinesource.com

I have used what you would probably describe as P2P lending several times over the years. There are many reasons I like this type of arrangement but they all revolve around my intense dislike for banking institutions and the way they handle customers. Nobody likes to borrow money. It is humiliating. And lenders generally do nothing to mitigate these feelings of inadequacy. They demand all kinds of personal information, treat every answer to every question with suspicion, and then compound this by making the customer pay to be humiliated in the form of application fees, inspection fees, legal fees, etc. With P2P arrangements I have always been treated with fairness and respect. The rules are simple. Put up collateral and make the payment. Interest rates are negotiable and based on a whole range of factors rather than simply profit and risk.

Credit Unions can combat P2P by training lending officers to empathize with customers and act as an advocate for the customer in negotiations with the institution. Insurance agents do this and form far closer bonds with their customers than loan officers do. How refreshing it would be to pick up this kind of empathy next time I apply for a loan. It is also worth noting that insurance companies pick up the tab for underwriting expenses. A very fair arrangement.

I am a member of VanCity CU and Williams Lake and District CU.

6) Kyle @ Jan 30, 2009
http://www.peertopeerreview.com

I like the comparison to Napster. It is ironic because the government more specifically the SEC has stepped in and said the selling of peer to peer loans is illegal because they are unregistered securities. Now, pretty much all lenders have gone quite. Lending Club seems to be the only one to open back up and started to reissue peer to peer loans.

The industry could be very different now becuase registration with the SEC means these notes or loans can be traded. This opens the door for a secondary market, which you can already find on Lending Club's website. This is some needed liquidity and has the potential to attract more investors

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This P2P song sounds so familiar.

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