In line with David’s recent post on social networks and investing, I stick to the topic and would like to point your attention to Social Finance…
VoIP companies such as Skype, now owned by Ebay, are having a big impact on the telecommunication business. Youtube and blogs are threatening traditional business models in media and communications. The business of head hunting is most likely altered by online social networks. Yet, the tools and structures to do money lending or investing have remained the domain of professional organizations such as banks. Could Social Banking or P2P lending change this?
Social Banking or people-to-people (P2P) lending is a term that is describing web based ventures that provide people an alternative opportunity to lend/borrow money. The banking is called social because it uses social mechanisms used in social software. The purpose of social banking can be for profit or non-for-profit.
How does it work?
Prosper.com was the first people-to-people lending market place (starting in mid 2006). Others followed such as the UK based Zopa, the German based Smava, CircleLending or the soon to be launched Microplace (bought by eBay). Lending club recently announced its collaboration with facebook where its application can be integrated by the 25 Mio+ facebook users. P2P lending allows people either to lend money or borrow money. People who want to borrow money name the amount and their maximum interest rate they are willing to pay. In addition they need a social security number, drivers liecense, a bank account so that prosper can verfiy the identity and other credit information. Borrowers also present their reason for lending the money (i.e. pay for K-School tuition, extend a business), their personal income and expenses and a picture. This information is available to anyone - even non registered members. Former lenders or others such as family members may endorse a borrower. Combined all these measure aim at creating an environment of trust, community and control. Borrowers may also found groups to improve their average credit rating which creates a level of pressure for all group members to avoid late payments which will have an effect on everyone else. Yet, only $25,000 can be borrowed at one time per group or individual borrower.
Lenders can bid on those loans although Prosper is essentially providing the loans and sells it to the lenders. In order to diversify risk, lenders can decide to lend small amounts of money to several borrowers with different credit rating.
Some thoughts
The boundary of interest rate elasticities is obviously determined by the market (central banks and major credit actors). Therefore, lenders are less likely to consider investing money once a borrower’s interest rate is below the one lenders would receive in a risk-free money market account. On the other hand borrower’s are most likely on willing to pay an interest rate that is the same or below the one provided by major market players.
I am just wondering whether this concept is transferable into any culture and nationstate. According to a survey 74% of British citizens would consider using social banking websites. In contrast, anyone I talked about the idea in Germany was very critical about it, especially the trust component. Trust, cultural norms, social circles and government regulations likely play an important role. Social Banking will certainly be an era where economists and experts of social networks and social capital can enrich each others discussion. This is an emerging trend and as I heard a hot topic for online business investors. Its too early to judge whether social banking can be a disruptive to the banking industry. However, that might be an interesting alternative to many people who are afraid of investing in stocks. Speaking of stocks, may be the next platforms allow individual users or groups of users to do their own IPOs - from P2P lending to P2P stocks!?
What do you think about social banking?
Where do you see its advantages and disadvantages?
Would you participate in it?
Can it disrupt the banking industry?
On a sidenote. There is a US based non-profit (Kiva.org) which is trying to do more or less the same thing for microcredits to the poor in developing countries. And the website netbanker is a good way to keep up with trends in the eBanking industry.