What goes around comes around

Social lending is becoming more and more popular, but is it a threat to conventional lenders?

 

By Simon Van Wyk

Social lending continues its momentum with peer-to-peer banking stalwarts Zopa and Prosper still going strong, and spawning no end of clones in many other markets.

If Gartner is to be believed, by 2010 social banking platforms will have captured 10 per cent of the available market for retail lending and financial planning.   That’s a pretty aggressive forecast - 10 per cent of all retail lending and financial advice services will go to social banking applications within the next two years.  I’m sure the industry has much to say about this forecast, but I think one thing’s for sure – social lending is not going away.

Indeed social lending will become an increasingly attractive alternative for all people, providing better interest rates for borrowers and higher returns for lenders.

Javelin Strategy and Research also predicts that the demand for person-to-person lending services will grow significantly over the next five years, with consumers turning to P2P lending services to pay off things like credit card debt. 

 “We see a surge in popularity among younger consumers because they’re accustomed to interacting in the social media space and also used to transacting online,” said Jean Garascia, an analyst with Javelin Strategy & Research. “Those two factors, plus their desire to help others, make person-to-person lending very appealing.”

No doubt banks are realising that they will lose business to person-to-person lending. But the big question is: How much? 

Sure banks can compete on the interest rate level but the community element of social banking is really starting to permeate the public’s mindset.  They want to use their money to help people like them. Or they want to borrow from people like them.

And that’s why banks need to put some creative thinking into the provision of their own social lending services. This may mean forming partnerships with social lending communities and following Richard Branson’s lead with Virgin Group’s acquisition of Circle Lending to create Virgin Money in the US. 

Australian-based social lending sites are also making headway, with Fosik and iGrin up and running and promising to make lending personal.  Plus there’s Brisbane-based Peermint planning to launch this year, and over in New Zealand Nexx is promising the future of finance when they open up shop.

There’s also speculation that Zopa is coming to these shores, along with new social lending services from Google, eBay and PayPal.

So with the growing noise behind this new alternative in financial services, coupled with the new P2P sites and services being launched and the tightening economy, more and more consumers will start to abandon what banks are offering and jump on board.

That said, with typical consumers now facing higher prices in the shops, along with interest rates on the upward trajectory and stagnant if not falling house prices, the seemingly insatiable desire for credit and the need to buy more stuff may actually be starting to wane.

With household debt levels at record highs, those in the mortgage belt are tightening their buckles, heralding what could be a brand new era of thrift. 

I’ve been particularly interested in a new and innovative US-based financial services site that is, quintessentially, the social network meets the bank.  But it is purely deposit/savings focused.

SmartyPig.com, launched in early March, is your piggybank on steroids.

Basically, you set a monetary goal for a specific item, add money to your account as you can, and make your savings goals public, allowing you to invite family and friends to contribute to your account, which also gains interest.  There’s also the additional incentive boosts from top retailers like Amazon if you buy what you’re saving for from them.

And as a nice extra, you can also add a SmartyPig widget to MySpace and Facebook pages so your contacts know what you’re saving for and can, should they so wish, top up the fund.

The savings accounts are held at Iowa-based West Bank and are covered by Federal Deposit Insurance Corporation insurance.

With social lending and social saving innovation, perhaps banks need to start putting a little more creative thinking into how they bring the idea of community into all areas of their products and services.

Simon van Wyk is founder of online marketing company HotHouse Interactive.